inequality, the dark side of development in indonesia

 RESEA
R
ARCH
H TEA
AM IN
NFID 45
40
39.30
0
36.15
37.17
10
35.1
34.96
35
32.53
31
1.02
30
02
30.0
29.13
28.07
28.55
25
20
15
11,5‐12,,5
16.66
15.97
17.75
12,5‐13
3,5
16.58
15.42
10
1
14.15
3.33
13
5
11.47
12.49
9
11.96
11.37
10,5‐11,5
9,,5 ‐ 10,5
0
2
2004
J
200
05
l hP
2006
d d k Mi ki
2007
2008
P
t
2009
P
20
010
d d k Mi ki
2011
2012
T
Mar‐13
t Ti k t K
INE
EQU
UALIITY,, TH
HE DA
ARK
K SID
DE O
OF D
DEVE
ELOPME
ENT
T IN IND
DONESIA
A
8,0‐10,0
i ki
Sep‐13
2
2014
INEQUALITY, THE DARK SIDE OF DEVELOPMENT IN INDONESIA Writers:
1. Ah. Maftuchan
2. Herjuno Ndaru
3. Irhas Ahmady
4. M. Firdaus
5. Mike Verawati Tangka
6. Sugeng Bahagijo
7. Tursia
8. Yustinus Prastowo
Published in cooperation:
This book has been produced with the financial assistance of the European Union. The contents of this book are the sole responsibility of INFID and
writers, and can under no circumstances be regarded as reflecting the position of the European Union.
i
Preface
In a people‐centered administration, the government has the obligation to adopt an economic and development approach that promotes equity and justice, to have a system in place that makes sure the people’s needs and concerns become the basis for policy‐making, and that sees the urgency of hastening the development pace of regions lagging behind. Indonesia at present is caught in a critical situation. Economic growth that has thus far been touted as a panacea for poverty and backwardness, has now shown its dark side; the ever widening income gap between the rich and poor, and worsening regional development disparities. Data released by BAPPENAS reveals that regional disparity has shown no signs of abating. In 1985, inequality between Java and other islands within Indonesia was at 54.4 % ‐ 45.6 %, which later rose to 57.6% ‐ 42.4% in 2012. This is an indication of how ongoing development has failed to evenly distribute prosperity gains outside of Java. Similarly, Indonesia’s agricultural sector over time has been forsaken, with increasing reliance on imported agricultural products. A paradoxical situation indeed for Indonesia as it has proclaimed itself to be a resource‐rich, agrarian nation. Farmers who are not duly protected by the State have switched to other sectors for their livelihoods. Under such circumstances, the long‐standing debate on state‐market balance has once again resurfaced. The extent to which government should assert itself in introducing policies that tackle inequality must factor in the paradigm that competition will only thrive in a free market mechanism which will ultimately lead to a path of mutual prosperity. The book that you now hold in your hands offers several alternatives on which policies to reduce inequality can be built on, not limited to regional imbalances, inequitable access and wealth inequality, but also draw from the failures of government programs. Failure stories are valuable lessons learnt. Not only do failures mean lost opportunities and even loss of public funds, but also bring new‐found hope that circumstances will change for the better. ii
Another point from this publication worthy of note concerns its write‐up process which involves intensive discussions, updated data collection, scientific references and current contextual analysis from numerous sources and reliable resource persons. INFID hereby extends its indebtedness to fellow contributors who have become an integral part of this publication, and a pool of resource persons who generously shared alternative perspectives and ideas to produce a book worth reading in an effort to constructively contribute towards a better Indonesia. Enjoy your read! iii
TABLE OF CONTENTS Preface Reinterpreting Inequality: A Pragmatic Approach 1 by: Yustinus Prastowo Inequality: A Study on the Dark Side of Development in Indonesia 46 by: Herjuno Ndaru Effectiveness of Poverty Reduction Policies and Programs 60 by: Tursia Inequitable Access to Bank Loans 80 by: M. Firdaus Promoting Oil Palm Policies that Support Smallholders for Sustainable Environment 95 by: Irhash Ahmady Inequitable Taxation in Indonesia: Baseline Mapping of Policy Areas and Options in an Effort to Tackle the Issue 115 by: Ah Maftuchan Inequality and the Education and Health Care Privatization Policy 131 by: Mike Verawati Tangka Super­Tax On France’s Mega­Rich and Indonesia’s 2014 Elections Mayor of New York City, Inequality and 2014 Elections iv
152 Reinterpreting Inequality: A Pragmatic Approach Abstract The issue of inequality has been garnering a considerable amount of research attention in the past several decades. Instead of becoming fairer and more equitable, the lion’s share of the development pie is being savored by an increasingly smaller circle of individuals and groups. Inequality has indubitably become a matter of grave concern, undermining the people’s sense of fairness and justice. Efforts to make sense of inequality are crucial by dissecting the issue from different perspectives. Applying the institutional approach often means reaching a dead end, where an ideal situation remains elusive. The author puts forward a pragmatic approach pioneered by Amartya Sen and pursued further by Martha Nussbaum on tackling inequality by reducing manifest injustices. Sen’s capability approach provides a promising way out for creating equal opportunities, primarily in favor of the weak and marginalized. Papers that explore the issue of inequality through the decomposing‐recomposing method can serve as a new source of reference and alternative for formulating more effective public policies. In the 19th century, some 120 years ago, Alexis de Tocqueville prophetically penned in his Memoir on Pauperism (1835): “In the Middle Ages, mankind lived under equal conditions due to their limitations and ignorance, while civilized man can create equality as they have at their disposal the same facilities to achieve comfort and happiness. Between the two, there exists inequitable conditions, welfare and knowledge – the power of the selected few, pauperism, ignorance and other weaknesses.” Tocqueville’s fears appear to have reverberated into modern‐day existence as inequality has become a troubling issue in the past two decades. Numerous opinions and theories have surfaced. Charles Piketty, a renowned economist and specialist on wealth concentration, has only recently published his monumental work titled Capital in the 21th Century (2014). World Bank economist and inequality expert Branko Milanovic authored The Haves and the Have­Nots (2011), and at the same time, economist and economic historian David Landes wrote The Wealth and Poverty of Nations (1999), Angus Deaton with The Great Escape (2013), Gregory Clark with A Farewell to Alms (2011), and lastly Daron Acemoglu and James Robinson with Why Nations Fail (2013). Nearly all of these written works materialized out of profound concern over widening income disparities and alarming poverty levels with no end in sight. Many experts and theories have approached and discussed the issue of inequality. A long‐
standing malady afflicting societies and civilizations from the earliest of times, inequality is therefore a social issue where powers and wealth are unevenly distributed. Discussions on inequality cannot be separated from talks about injustices, particularly regarding fair and just social structures. Borrowing from Branko Milanovic,1 inequality can be divided into three types: (i) inequality among individuals within a nation (ii) inequality between nations, and (iii) inequality among citizens of the world (global inequality). How then should the inequality 1
Branko Milanovic, The Haves and The Have-nots, Basic Books, 2011.
1
problem best be approached? There is no global consensus on this matter. Nonetheless, bearing in mind different pressures and dynamics that exist, solutions can be formulated through two key approaches: a comprehensive institutional approach that seeks to create fair institutions or the pragmatic approach that aims to uphold justice by eliminating factors that engender injustices. The Historical Roots of Approaches to Inequality Economists and social scientists typically approach the problem of inequality through three key questions: (1) What causes inequality among individuals within a nation? (2) Does a common pattern of inequality exist in a society? (3) Does inequality widen in line with economic expansion, and if yes, does it have a pro‐ or counter‐cyclical pattern? Discussions on inequality in the modern world can be traced to David Ricardo, founder of the theory of political economy. He foretold a population growth that would lead to rising demand for food and of landowners becoming wealthier. Karl Marx argued that mechanization and automation on one hand will push labor wages upwards, yet on the other hand will lead to diminishing returns, which in turn will escalate into a crisis. Both Ricardo and Marx approached the issue of inequality through the prism of social classes. It was only during the marginalist era, with Alfred Marshall as one of the prominent thinkers, that inequality was studied more from the individual rather than social dimension. The earliest statistical data was available in the 20th century when Vilfredo Pareto took an interest in measuring income distribution following the need for an equitable taxation regime. It was an epoch that marked significant ideological shifts. In upholding the principle of equality before the law, the well‐heeled are expected to pay higher taxes than the less fortunate. The availability of data on the have and have‐nots was therefore crucial to ensure accurately targeted fiscal policies. Pareto’s 80/20 rule, still popularly applied to this day, indicates a typical distributional pattern whereby 20% of the population owned 80% of income and vice versa. One of the weaknesses of Pareto’s law is that it does not allow for changes in the distributional pattern because of emphasis on the law of fixity. Economist and statistician Simon Kuznets in 1955 presented a theoretical framework that makes room for changes to income distribution patterns. According to Kuznets, the uneven distribution of income among individuals within a nation is not the same for all societies but depends on social make‐up. An agricultural society will endure less inequality compared to an industrial community due to insignificant differences in the income level of individuals. Widening inequalities however will narrow in the long run as redistribution and education policies are widely imposed. This theory is known as the U‐curve. Acemoglu and Robinson in Why Nations Fail (2013) appear to have ascribed these dynamics to the institutional factor which determines the rise or fall of a nation. Geographical and cultural factors that predominantly framed earlier hypotheses in the past several decades were challenged to rethink the significance of the institutional dimension, both economic and political. Both empirical studies show that the inclusivity of economic and political institutions better guarantee the success of a nation in attaining prosperity than an extractive institutional structure. This defeats the argument that establishes geographical and cultural dimensions as the determining factor of inequality among nations. This will create new opportunities for public participation in shaping public policies for reducing inequalities. 2
“Good” Inequality (ex ante equality) and “Bad” Inequality (ex post equality) Inequality clearly indicates that something is amiss, whereas equality would be the most ideal condition necessary to support the sustainability of a nation. Martin Ravallion, an economist who previously served at the World Bank, highlighted on how inequality affects pro‐poor and anti‐poverty programs.2 Francine Mestreum3 puts forward several reasons why a war should be waged against inequality. First, out of moral obligation, particularly given the fact that disparities do not occur out of natural consequences. Comparing Africa and Europe in terms of inequality would be irrelevant if both continents are not economically linked, but becomes essential if the two continents are engaged in close economic cooperation. Second, globalization on one hand leads to capital mobility; on the other hand it results in the concentration of labor. This creates an earnings gap between workers in developing and advanced countries as a result of barriers to immigration and capital influx into countries with low‐cost labor. Third, in relation to political instability, inequality can create social vulnerabilities and undermine social sustainability, an issue raised at the UN RIO+10 Conference. Fourth, concerning political citizenship, democracy presupposes political equality, while economic equality is an indicator of good democratic practices. Inequality undercuts the possibility of political equality due to the assumption that power‐property relations cannot be neutral. Fifth, the flow of debt from rich to poor countries entails unbalanced relations as indicated in net transfers of USD 51 – 132 billion annually from 1988 to 2003 compared to the deposits of poor countries at USD 1460 billion in banks in developed nations from which low‐
income countries also owe up to USD 700 billion in debt. Under such circumstances, is inequality always bad? Milanovic distinguishes between “good” inequality and “bad” inequality. The former refers to the necessary conditions and interventions for a better society, or in the words of John Rawls, inequality and favoritism will only be acceptable if it is to the benefit of the least‐advantaged.4 Prominent philosopher Ronald Dworkin5 stresses on the importance of making a distinction between ex ante equality and ex post equality. Ex ante equality – closer to “good’ equality – refers to equality as a benchmark whereby every citizen is afforded with equal opportunities, while paying heed to the freedom of every individual to the right of self‐actualization. Ex post equality promotes the equality of outcomes customarily practiced in socialist states. In general, ex post equality appears to be an ideal policy but when examined from the aspect of personal obligation to self‐actualize potentials, it would be an irrational option as it ignores the possibility of individuals achieving different goals and outcomes due to dissimilar choices and chances. Ex ante equality becomes a rational option when it refers to government obligation to guarantee equal treatment to citizens by continuing to uphold the principle that individuals have intrinsic potential and the responsibility to realize these latent capabilities. 2
Martin Ravallion, ‘Growth, Inequality, and Poverty: Looking beyond Averages’, in Anthony Shorrock and Androlph
van der Hoeven ( eds. ), Growth, Inequality, and Poverty: Prospect fo Pro-Poor Development, Oxford University
Press, 2004.
3
Mestrum, Francine, ‘Why We Have to Fight Global Income Inequality’, in Matti Kohonen and Francine Mestrum (eds.),
Tax Justice, Pluto Press, 2009.
4
John Rawls, A Theory of Justice, Belknap Press, 2005 (1971).
5
Ronald Dworkin, Is Democracy Possible Here? Principle for a New Political Debate, Princeton University Press, 2006.
3
Dworkin clearly rejects the doctrine of a laissez faire state with minimal government intervention. In practice, government role cannot be confined merely to making decisions on military spending, and not for education, health and other sectors. The concept of a minimal state is also unsuitable for a democratically elected government based on the assumption of equal treatment of citizens. Acemoglu and Robinson6 define democracy as a situation where political equality is created. The implication is the transfer of de jure political power from the elite (the rich) to citizens (the poor). The focus is on the responsibility of individuals to actualize their inherent potential. In this context, the State may not eliminate this liberty in the name of equality. The market, as a competitive arena, should remain open, allowing for healthy competition. In reality however market forces also cause inequalities. Markets per se are not the issue, but rather the fact that in these markets some produce better goods, and others have better fortunes. Redistribution through tax policies therefore becomes relevant because taxes are levied once a person has made a choice. Public policies can then be formulated in a fair and legitimate manner. The next question however is how should the State‐market relationship be in order to guarantee public policies that generate positive impact? Contemporary Reflections: State Versus Market? Given the foregoing situation, how best should the State‐market relationship be understood? Vito Tanzi in his latest work7 explicitly explained on the relationship between the two forces. He observed how the 20th century was marked by the government’s more assertive role in the economy. Data showed that in the wake of World War II, Western countries experienced a dramatic surge in public spending relative to GDP, tax ratio, social contribution and the scope of affairs which the State must administer to. In addition, a paradigm shift was also evident in public administration. The previously dominant Weberian approach was superseded by a model more accommodating towards market mechanisms known as the New Public Management model, then shifting to New Public Service that allows room for democratic participation, before eventually evolving into the Dynamic Governance model that rests on network capacity. Tanzi also underlined the emergence of a whole new set of problems: inequality, high poverty rates, ecological issues and rampant terrorism. In relation to globalization, Tanzi divided the relevance of public spending into two hypotheses: compensation hypothesis and efficiency hypothesis. Compensation hypothesis sees public spending as a risk absorber and the consequential logic is that an increasingly open economy implies expanding expenditures. The efficiency hypothesis on the other hand regards public spending as a contributing factor in reducing a country’s ability to compete globally. Empirical data has revealed that large governments with high levels of spending do not necessarily mean satisfactory performance of economic and social indicators. A converse relationship in fact is evident between the level of public spending and Human Development Index (HDI). A country with substantial expenditure does not suggest scoring high on its HDI. Tanzi’s pithy summary of the situation: despite the inefficiencies and mistargeting of public spending for most countries, nearly all governments have spent their energy on replacing the role of markets due to the assumption that markets have failed, and not because of efforts to improve performance. The Public Sector Performance Indicator (PSPI) of countries with leaner Daron Acemoglu and James A. Robinson, Economic Origin of Dictatorship and Democracy, Oxford University Press,
2006.
7
Vito Tanzi, Government versus Markets: The Changing Economic Role of the State, Cambridge, 2011
6
4
governments can better deliver public services than broader administrations. Researcher Andrew Glyn on the other hand noted that countries with sound welfare programs are more effective in reducing inequalities.8 Income Inequality: OECD Countries, 1980–2000 Ratio of post­tax incomes at 10% from top of the distribution to incomes 10% from bottom Countries c.1980 France 3.5 Germany 3.1 Denmark 2.8 Sweden 2.4 United Kingdom United 3.5 States 4.7 OECD mean 3.4 OECD std. dev. 0.8 North Europe 2.9 Liberal economies 3.9 c.2000 3.4 3.3 2.7 3.0 4.6 5.4 3.7 0.8 3.1 4.5 Source: Luxembourg Income Survey (Glyn,2006) From the table below, Glyn showed that welfare states are more capable of curtailing poverty rates through welfare programs and tax redistribution. Poverty and Impact of the Benefit and Tax System, 2000 Countries USA UK Canada Australia The Netherlands Germany Belgium France Sweden Finland Percentage of population in poverty, 2000 or late 1990s 17.0 12.3 11.9 11.2 8.9 8.2 7.9 7 6.4 5.4 Tax /benefits effect Tax /benefits effect in reducing in reducing inequality poverty, 2000 or late 1990s (% fall in Gini) (% fall in numbers) ‐ 25
‐61 ‐52 ‐55 ‐59 ‐71 ‐75 ‐70 ‐78 ‐70 ‐18 ‐24 ‐24 ‐31 ‐40 ‐42 ‐48 ‐41 ‐42 ‐40 8
Andrew Glyn, Capitalism Unleashed, Oxford University Press, 2006.
5
Source: Smeeding (2004); Forster and d’Ercole (2005). Excerpted from Glyn (2006) The data above illustrates two key points pertaining to government role in the modern world. First, the effectiveness of governments in improving the quality of human capital does not hinge solely on the level of public spending, but also on the appropriateness of government measurements. Second, the State ideology has a bearing on programs intended to reduce inequality and poverty. How then has the private sector fared? On a different level, the market logics of the private sector have similarly moved towards divergence. Capital has expanded at a staggering rate, moving unrestricted beyond the geographical boundaries of a sovereign state. In 2013, the Organization for Economic Cooperation and Development (OECD) released a document, Base Erosion and Profit Shifting (BEPS), for tackling aggressive tax avoidance. Driven by the motive of shifting profits to jurisdictions that offer low tax rates and protect confidentiality, multinational corporations such as Apple, Starbucks, Google and Amazon, have further confirmed accusations leveled against multinational enterprises (MNEs) on their business practices that threaten global economic order. This initiative brought forth what is known as stateless income. Both developing and advanced countries concur that MNEs should be declared as a common enemy. A survey conducted by Ernst & Young (2003; 2013) observed rising popularity in applying transfer pricing to boost tax efficiency. Nevertheless, there has been greater appreciation towards the private sector represented by small to medium‐scale enterprises (SMEs) in bringing fresh hope, providing a strong pillar of support for the national economy. A new chapter in the global economy now opens with the promising growth of this particular sector known as social entrepreneurship. In view of this, how should we understand government‐market relationship typically constructed as being hopelessly at odds with each other, irreconcilable and uncompromising? Doesn’t the government and markets each have their own set of weaknesses that creates new problems? Or does the relationship between the two in fact create other avenues that lead to a way out? Considering the Capability Approach As described earlier, we are given the option to ideally create fair and just institutions for attaining common goals or pragmatically strive towards actualizing justice by dismantling barriers that give rise to injustices. The following information further illustrates the situation. Public spending rises over the years as shown in the graph below. However, the unbelievable pace internet usage has increased in Indonesia has not been directly proportional to improvements in the Human Development Index. Or in other words, an institutional mechanism is plainly absent to ensure that information delivery and easy access directly contribute towards improving the quality of human capital. 6
Perkembangan Belanja Pemerintah Pusat Menurut Fungsi
Asupan teknologi mutakhir VS Indeks Pembagunan Manusia (HDI)
20.0%
18.0%
18.0%
16.0%
Internet users as % of population
14.0%
HDI
12.0%
10.0%
8.4%
7.7%
8.0%
5.6%
6.0%
4.6%
3.5%
4.0%
2.0%
2.1%
2.3%
2.5%
1.9%
0.9%
0.543
0.543
0.543
0.543
0.543
0.572
0.579
0.591
0.598
0.607
0.613
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.0%
Sumber: Yanuar Nugroho, 2012 (diolah dari Human Development Index (2010) dan
Internetworldstats (2010))
The graph below also further substantiates how the country’s development path has veered sharply off course. The upsurge in public expenditure to combat poverty has failed to reduce the number of poor people. 7
Anggaran Pengentasan Kemiskinan vs Angka Kemiskinan
100
94
90
Anggaran Pengentasan Kemiskinan
(in triliun rupiah)
80
70
66
63
60
51
50
42
40
30
20
10
23
Angka Kemiskinan
(% penduduk)
18
16,7
16
17,8
16,6
15,4
14,2
2008
2009
13,3
0
2004
2005
2006
2007
2010
Sumber: Menkokesra, BPS
Development efforts likewise have been futile in spreading out wealth more evenly among citizens. This is evident in the disturbing trend of wealth accumulation concentrated on high‐
earners. This is partially attributed to a less than optimal taxation function as a means for wealth transfer from the haves to the have‐nots. Income tax revenue that reflects justice based on the principle of ability to pay has not increased significantly, particularly for non‐employee personal income tax as compared to Article 21 of the Income Tax Law. DISTRIBUSI PENDAPATAN
8
Source: BPS, compiled. GrafikStruktur Penerimaan Pajak2006 – 2012
Source: Financial Notes and Ministry of Finance, compiled. When the course of development has lost its bearings, it would only be fitting to call to mind Amartya Sen’s proposition.9 We have thus far been preoccupied with creating fair and just institutions intended to disentangle the intricate web of problems. These institutions instead have for certain failed to become effective agents of change. Sen has therefore offered the capability approach in line with his proposition to promote justice through concrete actions for reducing and eliminating injustices. Sen has placed freedom on the highest pedestal. The fate and quality of life of humankind, according to Sen, rests on the extent to which freedoms are expanded. The expansion of freedom is inextricably linked to his notion on justice. Sen defines freedom into two distinctions: well‐being freedom and agency freedom. Well‐being freedom (the freedom to improve conditions) or known as capabilities refers to the real opportunity to achieve what a person wishes to do or to be in leading life. Agency freedom on the other hand is the freedom to attain whatever that is considered good. The former denotes opportunity while the latter indicates process. Both concepts of freedom are interdependent, analogous to two sides of the same coin, inseparable from one another. 9
Amartya Sen, The Idea of Justice, Belknap Press, 2009; Inequality Reexamined, Harvard University, 1995; (Sen)
Development as Freedom, Anchor, 2000; Rationality and Freedom, Belknap, 2004. A succint explanation on Amartya
Sen’s thoughts, see Sunaryo and Arif Susanto, Kursus Teori Keadilan dan Pemikiran Amartya Sen, Inded, 2012
(unpublished).
9
Sen understands freedom as both the ends and means of development. Improving the quality of life is about freedom and to this end, freedom is of utmost importance. To illustrate this, Sen offers an example of the correlation between democratic system and well‐being. Democracy guarantees freedom of the press, freedom of opinion and freedom of political life which in turn opens up space for further improving conditions. Famines in democratic countries, he observed, can be better anticipated compared to authoritarian regimes. With freedom of the press and freedom of opinion, incidence of hunger and starvation will be publicly exposed by the media and civil society, exerting pressure on the government to take action in order to attenuate the impact. The future of democracy on the other hand depends on the well‐being of the people. Economic instability poses a serious threat to the future of democracy and freedom. Sen’s concept of well‐being freedom or capability is directly associated with human freedom. The poor are those denied the liberty to achieve what they seek out to do or to be. Sen therefore does not define poverty according to people’s income, but the degree to which they can convert real opportunity into the capability to achieve goals that they value. He defines poverty as the deprivation of basic capabilities. An individual’s ability to attain what constitutes as valuable to that person is not only determined by personal capacity. Sen believes that the freedom to realize goals and ambitions depends on the complex intertwining of external factors. Nature, the environment, public policies and political system significantly contribute in guaranteeing the expansion of capabilities to bring expectations to fruition. Sen describes agency freedom as the process to which a person has the liberty to make choices that they perceive to be of value. There at least three considerations as to why freedom in this context becomes essential: 


Intrinsic considerations. Freedom that allows people the right to self‐determination in making life’s choices of value to them, without any pressure or coercion from others. Instrumental considerations. Freedom as a process that provides the means to pursue goals of their own choice. Constructive considerations. Freedom as a process that shapes and determines the course of life considered to be of value. Martha Nussbaum, a disciple of Sen, has taken a step further.10 She criticized existing development approaches that have long been practiced, focusing on three main approaches to development:11 

GDP approach. This approach follows a standard and transparent measurement on welfare and income, but fails to provide insight on the distribution of benefits and income. Utilitarian approach. This approach highlights on the utility of population to measure the level of satisfaction, but incapable of identifying the different types of people and relative social conditions. 10
11
Martha Nussbaum, Creating Capabilities: The Human Development Approach, Belknap, 2011.
Compare with Joseph Stiglitz, Amartya Sen, Jean Paul-Fitoussi, Mismeasuring Our Lives: Why GDP doesn’t Add Up,
New Press, 2010 as criticism against the dominant and authoritative GDP approach.
10

Resource­based approach. This approach emphasizes on the distribution of resources, but overlooks the differing needs for resources and dissimilar levels of capacity to convert resources into functionings. Nussbaum subsequently underscored the need for an approach that appreciates individual efforts to develop themselves, regarding every person as an end in itself and a dignified agent of change. She built upon Sen’s rationale on the issue of functionings and capabilities from only which an approach can fairly accommodate complex interrelations between self‐development efforts and the material and social contexts. The capability framework pioneered by Amartya Sen – as Nussbaum contends – is an approach to assess the quality of life and a theoretical proposition of social justice. According to Nussbaum, the capability approach should at least encompass the following principles: 





This approach poses the key question: What is every person capable of doing and what does the person wish to actualize? This approach positions every person as an end in itself by questioning real opportunities available to the person, and not about their income. This approach focuses on choices or freedoms as people can achieve what they wish to pursue with substantive freedoms afforded to them. This approach pays heed to injustices as failures of human capabilities as a corollary of discrimination and social exclusion. Capabilities are related to substantive freedom that refers to a basket of opportunities (normally interrelated) to make choices and take actions. Capabilities denote an alternative combination of different functionings that a person can actualize. Capabilities are not simply about the intrinsic ability of a person, but also include freedoms or opportunities as a combination of personal capability and political, social and economic settings. The main focus of Sen’s work according to Nussbaum is to identify capabilities as a comparable factor for assessing the quality of life. Sen’s approach, although a normative theoretical framework that draws attention to the issue of justice, does not provide a definitive rationale for basic justice. As a consequence, Sen has not developed 1] a detailed list of capabilities, 2] an advanced concept on human dignity, 3] a political principle necessary for minimum social justice. Nussbaum then directed her arguments beyond Sen’s capability approach, moving towards the construction of a normative political proposition as a theory of justice. She puts forward three types of capabilities: 1. Basic capabilities. The innate endowment of individuals as a basic necessity to develop subsequent capabilities. Example: sight and hearing. 2. Internal capabilities. Further personal advancements with sufficient internal conditions to perform functions that may require a supportive environment. Example: ability to speak in the native language. 3. Combined capabilities. A combination between internal capabilities and favorable external conditions for exercising functions. Example: a widow not allowed to remarry possesses internal capabilities but hampered by combined capabilities to actualize sexual expression. 11
12
Nussbaum proposed several core capabilities: 









Life. Able to live to the end of the normal length of human life under decent conditions. Bodily health. Able to have good health; adequately nourished; decent shelter. Bodily integrity. Able to move freely from place to place; secure against acts of crime; being able to freely make choices on reproduction. Senses, imagination and thought. Able to use one’s senses to imagine, think and reason in a humane manner. Emotions. Able to have attachments to things and people outside ourselves. Practical reason. Able to form conception of the good and critically reflect on the planning of one’s life. Affiliation. Able to live with and toward others; having the social basis for leading life with dignity. Other species. Able to have concern for and live with animals, plants and the environment. Play. Able to laugh, play and enjoy recreational activities. Control over one’s environment. Able to exercise socio‐political and socio‐economic rights, and to manifest these rights through social participation. A New Development Path: Cultivating the Economy Earlier sections explore a viable way out to the development dilemma of being caught between the equally vicious ‘jaws’ of the market and State. The issue at hand resonates loud and clear. It is not about the debate on the State or market, neither is it about market or non‐market preferences, but concerns institutional arrangements, among others on whether the market needs to be merged? Aren’t development successes and flaws maintained by the ineffectiveness of the State and market combined? In reference to existing data, we may be challenged to come up with a new ideological landscape amid rising public spending and heightened government role, and on the other side of equation the private sector and its increasingly prominent role and autonomy on a global scale. Articles presented in this publication came about from a deep concern over inconsistencies and deviations in the human development process which appear to have intensified. Instead of being treated as development subjects, people are thrust further aside as mere objects of development projects where success is mere statistics. These papers reflect the serious attempt to probe deeper into the issue of inequality in Indonesia by exploring, analyzing and seeking workable solutions. Similar endeavors have been initiated in developed countries, but within the Indonesian context this undertaking is relatively new. A new angle that these studies have taken is to capture inequality through a scientific method applied by eminent thinkers prior to the rise of modernity known as decomposing‐recomposing. Social structures are broken down into smaller units and analyzed. In terms of social spending, Tursia looked into poverty reduction programs that are far from effective. After delving into each and every relevant issue, the author arrived at the conclusion that coordination, data validation and outcome measurements remain weak. From an ethical point of view, anti‐poverty programs can be tested by determining whether the means justify the ends. The ultimate purpose of 13
poverty alleviation efforts is not to have diverse, well‐intended programs, but guaranteed quality and prosperity of the people of Indonesia, without exception. In the same vein as Tursia’s, M. Firdaus examines equality of opportunity for micro, small and medium‐scale entrepreneurs in accessing bank loans. Banking policies reflect the reality of banking institutions’ aversion toward MSMEs which in turn perpetuates unbalanced, unhealthy competition. Rawls’ words of caution that unequal treatment is only justifiable for those who are worst‐off clearly apply to Indonesia’s banking sector. The government’s role as a regulator is expected to bring this persistent problem to an end if the government stays faithful to the welfare‐state ideology. The State must be bold enough to uphold the constitutional logic (raison d’être) versus accounting logic (market logic).12 A concrete example of capability deprivation is the marginalization of oil palm growers by oil palm conglomerates. There has never been a single policy that decisively takes sides with independent farmers. The government has even failed to enforce the law upon large corporations that have blatantly violated the law. This dismal portrait of existing oil palm policies only affirms hyperbolic narratives delivered as nothing more than mere jargon. Apart from the bleak outlook on social spending, this publication also awards attention to revenue which in this case refers to taxation. The issue on tax revenue has long been pushed to the sidelines when it contributes 75% to total state earnings. Ah Maftuchan investigates Indonesia’s problematic tax policies not conducive to the equality paradigm. Tax payers are still predominantly represented by individual employees which suggest unequal participation in the payment of taxes according to the ability to pay. Furthermore, a lop‐sided tax revenue structure reflects a mere pittance in the amount of personal income tax collected from non‐
employees compared to taxes paid by workers as stipulated in Article 21, Income Tax Law. Value‐added tax is also fairly high and almost equal to corporate income tax. “Tax collection without tax policy” probably fittingly describes tax practices in Indonesia. A mixture of policies caters to the interest of large‐scale businesses, while incentives for lesser industries, the working class, women and children are not forthcoming. Taxation as an instrument to reduce inequalities has yet to become the government’s preferred option. Lastly, Arief Anshory Yusuf encapsulates sectoral and thematic decomposition into a single narrative as a whole (recomposing). The issue of inequality in Indonesia is presented through infographics that astounds and saddens us at the same time. Arief asserted that aggregate economic growth has been reasonably inclusive as it manages to elevate income levels and lower poverty rates. However, in respect to inequality, economic development and growth has not succeeded in tackling the issue. This clearly proves that economic policies are not oriented towards pro‐
poor growth. This introduction shall steer clear of having to reiterate the agony of injustices and disparities. By presenting the lucid thoughts and concrete solutions of the authors, this introduction proposes an approach that may serve as an antidote for the tiresome rivalry between the State and market by creating capabilities bolstered by civil society’s broadened participation. Development must be re‐rooted in the values and needs of humans as subjects. By identifying measurable high‐quality outcomes, devising the appropriate strategies and widening public participation, the problem of inequality and poverty can become a point of departure for reinterpreting and refocusing the development vision. Otherwise, we will be making the same mistakes repeatedly, falling for the same trap if development is still presented in grandiose 12
B. Herry-Priyono, Hukum Besi Ekonomi-Politik, Majalah Basis, No. 3-4, Year 63, 2014.
14
narratives clinging to the assumption of anonymous, neutral development actors. Development should genuinely mean expansion of freedom, equal opportunities and supportive towards the most disadvantaged and marginalized. This anthology of papers framed around the issue of inequality can serve as a source of reference, point of departure and ultimate framework for re‐formulating public policies in Indonesia. It is now time for us to take the liberty to decompose and recompose development policies and strategies. Undervaluing the essence of the written works presented in this publication means dispensing with attempts to improve and safeguard Indonesia, and take this nation forward. 15
References 1. Acemoglu, Daron and James A. Robinson, Economic Origin of Dictatorship and Democracy, Oxford University Press, 2006 2. Acemoglu, Daron and James A. Robinson, Why Nations Fail?, Oxford University Press, 2011 3. Dworkin, Ronald, Is Democracy Possible Here? Principle for a New Political Debate, Princeton University Press, 2006 4. Francine, Mestrum, ‘Why We Have to Fight Global Income Inequality’, in Matti Kohonen and Francine Mestrum (eds. ), Tax Justice, Pluto Press, 2009 5. Glyn, Andrew, Capitalism Unleashed, Oxford University Press, 2006 6. Milanovic, Branko, The Haves and The Have‐nots, Basic Books, 2011 7. Nussbaum, Martha, Creating Capabilities: The Human Development Approach, Belknap, 2011 8. Piketty, Thomas, Capital in the Twenty­first Century, Cambridge, MA, 2014 9. Piketty, Thomas, Dynamics of Inequality, New Left Review, Jan‐Feb 2014 10. Priyono, Herry B., Hukum Besi Ekonomi­Politik, Majalah Basis, No. 3‐4, Year 63, 2014 11. Rawls, John, A Theory of Justice, Belknap Press, 2005 (1971) 12. Ravallion, Martin, ‘Growth, Inequality, and Poverty: Looking Beyond Averages’, in Anthony Shorrock and Androlph van der Hoeven (eds.), Growth, Inequality, and Poverty: Prospect of Pro‐Poor Development, Oxford University Press, 2004 13. Sandel, Michael J., Justice What’s the Right Thing to Do?, FSG New York, 2009 14. Sen, Amartya, The Idea of Justice, Belknap Press, 2009 15. Sen, Amartya, Rationality and Freedom, Belknap Press, 2004 16. Sen, Amartya, Development as Freedom, Anchor, 2000 17. Sen, Amartya, Inequality Reexamined, Harvard University, 1995 18. Stiglitz, Joseph, Amartya Sen, Jean Paul‐Fitoussi, Mismeasuring Our Lives: Why GDP doesn’t Add Up, New Press, 2010 19. Susanto, Arif and Sunaryo, Lecture Notes for Course on Theory of Justice and Amartya Sen’s Viewpoint, Inded, 2012 (unpublished). 20. Tanzi, Vito, Government versus Markets: The Changing Economic Role of the State, Cambridge, 2011 16
17
Inequality: A Study on the Dark Side of Development in Indonesia Abstract Inequality has further widened in Indonesia as indicated in the country’s Gini coefficient which has risen since 2004. Indonesia’s Gini index in 2013 reached 0.42, a record high since the 1960s. Worsening inequality is attributed to two key factors: economic policy and institutional factor. Economic policies that maintain economic dualism, agricultural laws that are more favorable toward corporations and structural transformation failures have led to disparities. Furthermore, biased, corrupt institutions dominated by the oligarchic elite have also contributed to growing inequalities. In Indonesia, livestock import is an example put forward in this study to examine how the institutional factor impacts on inequality. To narrow existing gaps, this study recommends measures that promote equality through asset, land and income redistribution. Second, the government needs to strengthen social policies that allow the people to improve their well‐being. Third, the government must more systematically empower the poor and local communities. Efforts to reduce inequalities should also adopt a sectoral approach by paying specific attention to the agricultural sector, primarily in responding to structural transformations. 18
Chapter I "Human development is the end ­ economic growth a means. So, the purpose of growth should be to enrich people's lives. But far too often it does not. The recent decades show all too clearly that there is no automatic link between growth and development. And even when links are established, they may gradually be eroded...." – United Nations Development Programme The foregoing excerpt taken from a United Nations Development Programme (UNDP) report in 1996 reflects how global economic growth has not been translated into socio‐economic policies capable of elevating the well‐being and dignity of the poor and marginalized. In the report, UNDP brought to attention the five undesirable forms of economic growth within global capitalism which many countries worldwide have embraced: jobless, voiceless, futureless, rootless, and ruthless. (UNDP, 1996). The UNDP report highlights on disparities among countries in which the income of 20% of the world’s poorest has declined from 2.3% of total global income to a mere 1.4% from 1960 to 1996. Meanwhile, the wealthiest 20% percent of the world’s population hold 70% of global income in the 1960s which increased to 85% in 1996. This has led to a widening rich‐poor wealth gap of 30 : 1 in 1996, which doubled from 30 years ago at 61 : 1 in the 1960s (UNDP, 1996). How is the development situation today? In November 2013, the World Economic Forum (WEF) published the Outlook on the Global Agenda which ranks income inequality as one of the key global issues of the future that will further worsen and be of greater risk. This trend is not only highlighted by WEF, but also by international humanitarian organizations and academicians. According to Oxfam, an international humanitarian aid agency, a total of 210 people have become new billionaires in the past year joining the existing 1,436 billionaires with a combined net worth of $5.4 trillion annually. The world’s wealthiest 1% earns $110 trillion, or 65 times the total wealth of the bottom half of the global population. What about Indonesia? An Oxfam report reveals a similar situation for Indonesia with an ever widening divide from year to year. This is illustrated in the graph below. 19
Graph 1 : Income Inequality in Indonesia Source : Oxfam, 2013 The graph shows Indonesia’s increasing inequality, particularly after 1999, where the disparity between the richest 10% and the poorest 40% further widens due to a drastic drop in the income share of 40% of the country’s poorest compared to the wealthiest 10%. Similarly, the Asian Economic Policy Review also emphasized on rising inequality in East Asia, including Indonesia. Hal Hill (2008) wrote that Indonesia’s economic growth is enjoyed more by those living in regions where economic activities are concentrated. Regions isolated from these growth hubs tend to lag behind, leading to the emergence of new, more prosperous areas such as East Kalimantan and Riau. Papua and Nusa Tenggara on the other hand remain left behind as indicated in their extremely low level Human Development Index. What about the Gini index? One of the standard indicators of economic inequality is the Gini coefficient with values between 0 and 1. The closer the coefficient to 1, the greater the inequality and vice versa. BPS (Indonesian Central Bureau of Statistics) recently released Indonesia’s Gini coefficient for 2012 which scored 0.42, an increase from 0.41 in 2011. This is the first time in history that the country’s Gini coefficient reached the level of 0.4. The index is reported to have sharply increased, particularly in urban areas which remain higher compared to rural areas. 20
Graph 2 : Indonesia’s Gini Index, 1999­2012 0.42
0.41
0.33
0.40
Indonesia
Urban
Rural
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
0.20
Indonesia (BPS)
Source : Arief Anshory Yusuf, 2014 Economic development under capitalism has failed to open up ample room for the poor and marginalized to engage in the development process. Global economic growth in 2013 reached 2.9% and in Asia Pacific it is reported to be 6.9%. Indonesia managed to post an impressive 6.2% in economic growth in 2013, one of the highest in Southeast Asia. Other development indicators also showed a positive trajectory. Investments in Indonesia rose more than 50% from 2009 to 2012. Tax and non‐tax revenue similarly experienced an upward trend. The International Monetary Fund (IMF) in 2011 forecasted that Indonesia will develop into one of the world’s economic powerhouses, predicting its economic share to reach USD 7 trillion by 2050, and ranked 7th position after China, United States, India, Brazil, Mexico and Russia. Price Waterhouse Coopers (2013), an economic research consultancy firm, likewise foresees Indonesia to be the world’s 8th largest economy capturing an economic share of USD 6.3 trillion. The World Bank (2011) predicts that Indonesia will be among the six countries with the largest contribution to global economic growth by 2025. What does this signify for human development? According to data from BPS and the World Bank, Indonesia’s poverty rates have decreased over time. In reference to the World Bank standard, Indonesia’s poor population accounts for 15.4% in 2008, and later dropped to 14.2% in 2009 before falling further to 13.3% in 2010. In 2011, the poverty rate was 12.5% and in 2012 the proportion of the population which the World Bank categorized as poor decreased to 12%. Inequality on the contrary has worsened. Indonesia’s Gini index reveals a widening gap. This disparity is not only inconsistent with the decline in poverty rates but more substantially with Indonesia’s GDP which has consistently moved upwards. Apart from the Gini measure for income, other equally important factors to serve as reference point and benchmark in analyzing inequality are the Gini ratio for wealth and land ownership. Wealth plays a crucial role for an individual’s pursuit of income. According to Hernando De Soto (2003), all types of assets can be utilized to generate income. Within this context, asset inequality can bring about potential disparities in the long run. A study conducted by Rand Institute (1997) found that 1% of Indonesia’s wealthiest people have taken control of 28.7% of total assets, whereas the richest 5% and 10% own 56% and 21
65.4% of total assets. The wealth of Indonesia’s richest 10% (65.4%) is far above their income share of 30%. In relation to this, Indonesia is ranked 17th position among 150 countries surveyed with the highest inequality in terms of its Gini measure of wealth (Davies, 2009). What does Davies’ study imply? Davies (2009) contended that the concentration of asset control is an indication of the poor quality of services and public goods, such as health care, public transport or public space, and an increasingly lack of resources which all can enjoy such as water and air. Behind these statistics are the unequal control of assets and land that national policies need to pay serious attention to. In Indonesia, the redistribution of assets and land (land reform) remains relatively hard to implement, even though the government is committed to agrarian reform early on since President Susilo Bambang Yudhoyono came to power. Improvements to social services and human development can serve as an indicator of inequality reduction. A UNDP report in 2013 ranked Indonesia at 121st position with regard to its Human Development Index (HDI), considered an average score in Southeast Asia. Neighboring countries such as Singapore, Brunei Darussalam, Malaysia, Thailand and the Philippines have higher HDI. Indonesia however has performed better than Vietnam, Cambodia, Laos and Myanmar. Compared to ASEAN’s economic growth, Indonesia ranks among the highest. Nevertheless, the rate at which Indonesia’s HDI has improved has not been as fast at its economic progress. The Philippines and Brunei Darussalam for example have much higher HDI but with less rapid economic growth compared to Indonesia. From 2009 to 2012, Indonesia’s economy has consistently grown above 6% annually, whereas other ASEAN member states, such as the Philippines, were only able to surpass 6% after 2013. Wilkinson and Pickett (2010) in their book The Spirit Level, observed a close link between inequality and the quality of life or well‐being of a nation. They explained how weak social cohesion is a consequence of inequalities that exist in society. The well‐being of a nation can be undermined by social conflict, increased crime rates, lower level of happiness, worsening health status, eroding social trust and political instability. Social and income inequalities therefore are not simply economic issues but also pertain to the people’s resilience and sense of security. Economic Policy Factor Seen from a historical lens, Indonesia’s economic structure as a result of colonialism has created a divide between the informal and formal sectors (Hill, 2008) or known as the phenomenon of economic dualism. The formal‐informal gap has excluded the informal sector from the economic development process. As a consequence of this exclusion, the formal sector has continued to move forward without a gradual transformation from the agricultural sector to agroindustry. The agricultural sector has failed to transform into an industry with added value (Wickramasinghe et.al., 2012). Farmers are therefore caught in a cycle of low productivity. This is evident from the agricultural sector’s minor contribution to GDP yet has a high labor absorption rate. According to data from the Ministry of Agriculture (2012), the agricultural sector (including the plantation sub‐sector that covers oil palm, rubber, cocoa and others) only contributed 15.14% to GDP and employs 39% of the country’s population. A UNESCAP study found that the lack of high value‐added activities in the agricultural sector is indicated in the insubstantial amount of credit channeled to the agricultural sector reported to 22
only account for 6% of total loans offered by banking institutions in 2012 (Siregar in Wickramasinghe et.al., 2012). Because growth has not been based on the local economy, several observers such as LIPI, BPPT and ITB, predict that Indonesia will be at risk of de‐industrialization (http://www.technology‐indonesia.com/ict/layanan‐informasi/106‐indonesia‐mengalami‐de‐
industrialisasi and Kompas, 22 December 2010). De‐industrialization is due to the weakening competitiveness of the industrial sector accompanied by the agricultural sector’s declining contribution to GDP. In the agricultural sector, investments in terms of quantity have expanded. In 2008, the Ministry of Agriculture recorded domestic investments worth IDR 1.18 trillion which then rose to IDR 9.63 trillion in 2012. Foreign direct investments on the other hand amounted to USD 147 million in 2008 which surged to USD 1.271 billion in 2012 (Koran Sindo, 28 August 2013). How does this affect farmers? A boost in agricultural investments has instead lowered farmers’ terms of trade (FTT). The farmers’ terms of trade refers to the ratio between the index of prices received by farmers and the index of prices paid by farmers expressed as a percentage. In terms of concept, FTT measures the trading position of agricultural goods (products) produced by farmers relative to goods or services needed for household consumption and for agricultural inputs. On a national scale, FTT for 2014 reached 101.95. This means that a farmer who has paid IDR 100,000 in expenses will generate profits worth IDR 1,950. The farmer’s profit margin is therefore only 2% from total production cost. Food crop farmers receive far less economic gains with FTT at 99.88 which results in a loss of IDR 120,000 when a farmer incurs IDR 100,000 in production costs. Figures vary for horticultural growers and smallholder farmers. The following table presents the FTT for each agricultural sub‐sector from 2011 to 2014. Table 1 : National Farmers Terms of Trade per Year by Sub­sector Year Sub‐sector General Food crop Horticulture Plantation Animal Husbandry 2011 2012
2013
2014 105.75 105.39 109.00 107.20 101.02 105.87 106.27
108.57
105.19
101.61
101.96 100.24
101.53
100.88
105.79
101.95 99.88 101.78 101.11 105.76 Source : BPS (Central Bureau of Statistics), 2014 The table above in general shows a declining trend in the FTT of Indonesian farmers despite an increase in investment realization in 2012. Food crop farmers in fact suffer losses and based on FTT calculations did not generate any profits in 2014. The FTT for food crop, horticulture and plantation sub‐sectors decreased over the years, while the animal husbandry sector experienced an improvement in its terms of trade. At the regional (sub‐national) level, BPS found that many regions across Indonesia have an FTT of less than 100 in 2014. Farmers are 23
therefore struggling with losses as their production inputs have not been in proportion to their earnings. Provinces with a negative FTT include Aceh, North Sumatra, Riau, Jambi, Bengkulu, West Nusa Tenggara, East Nusa Tenggara, West Kalimantan, Maluku, West Papua, and Papua. Meanwhile, provinces with the highest FTT are Banten and South Sulawesi (Banten’s FTT in 2014 at 105.00 and South Sulawesi at 104.98). West Kalimantan has the lowest FTT at 96.62. In relation to increases in agricultural investments, the issue on inequality where much attention has been focused on concerns policies that appear to lean toward corporatism. Corporatism refers to an industrial policy that prioritizes major players compared to non‐
corporate actors and other lesser players. Numerous studies, such as the one conducted by UNDESA (2014), reveal how corporatism has mainstreamed into the agricultural policies of many countries, including Switzerland, China and Austria. These countries have modernized their agricultural sector by giving precedence to corporate investments rather than developing smallholders. This trend towards corporatism has also surfaced in countless other countries under the contract farming scheme. Indonesia has long applied the contract farming approach. Tambunan (2012) observed that the contract farming business model has failed to empower farmers even though in terms of business relations, products produced by farmers under this scheme are purchased by companies. In certain cases however, this approach has worked against small farmers. An example is Nestle’s contract farming scheme with dairy farmers in Kanjuruan, East Java whereby the Dairy Processing Industry (IPS) in which Nestle is also a part of, has not set a fair and reasonable price for dairy farmers. Another contract farming case that has also caught public attention concerns corn growers in East Java who have entered into a production contract with Pioneer, a corn seed producer. In the business contract, farmers buying seed from the company will break the law if they locally cultivate their own corn seeds. Corn farmers in East Java will be liable to 17 counts of violations should they insist on developing their own corn seeds. Corporatism is believed to be one of the causes of inequality, specifically for farmers, plantation growers and fishermen who rely on these commodities as their main livelihoods. In Alderson’s work titled Globalization and the Great U Turn, corporatism is mentioned as one of the dimensions related to the institutional factor that has led to income inequality in 16 OECD member countries. This income gap has in turn brought about disparities in wage setting, lower school enrolments and women’s increased labor force participation. Under such circumstances, the relationship among relevant actors therefore needs to be directed toward narrowing inequalities. Industrial and trade policies favorable to small‐scale farmers must be promoted and realized in various sub‐sectors. Partnership arrangements between corporations and farmers need to be re‐examined in order to ensure a fairer and more balanced relationship. Inequalities in the real sector of the economy are also reflected in the many cases of conflict between corporations and the local community. Prayogo (2010) recorded a number of cases involving mining corporations from 1998 to 2003, including Kaltim Prima Coal, Unocal, Kideco Jaya Agung, Kelian Equatorial Mining, Tinto Harum, Indomuro Kencana, Expans Tomori Sulawesi, Permata Karya Graha Sakti, Meares Soputan Mining, Prima Lestari, Pulau Indah Teknik, Inco, Newmont Minahasa Raya, Newmont Nusa Tenggara, Freeport Indonesia, Newcrest Halmahera, and Exxon Mobil in Aceh. A particular case that drew national attention was the alleged industrial pollution in North Sulawesi perpetrated by Newmont Minahasa 24
Raya, and in 2006 involving Freeport Indonesia in Papua and Newmont Nusa Tenggara in Sumbawa. Research conducted from 1999 to 2003 found a similar phenomenon for Unocal, BP, BHP‐Arutmin, Newmont Sumbawa, Banpu, and KPC, Banpu and Berau Coal (Prayogo, 2010). Banking policies that have not been inclusive enough have also made inequality worse. Indonesia’s banking sector is reported to place priority on gaining high net interest margin (above 5% annually) instead of credit absorption by micro, small and medium‐sized enterprises (MSMEs). Consequently, banking customers and small businesses, particularly micro enterprises, are left with uncertainties and banks not fulfilling their intermediation function for local businesses in Indonesia. This poor quality of intermediary role is evident in the banking sector’s imposition of high interest rates for loans channeled to micro and small‐
scale enterprises. Interest rates for small businesses applied by private banks can reach 93.5% of total loans for a three‐year repayment period. This exceeds the limit set by Bank Indonesia. Indonesian banks have opted for growth in interest income and high net interest margin (NIM). Banking institutions in Indonesia on average have higher NIM compared to other ASEAN countries, such as Malaysia and Singapore. Bank executives in Indonesia are also reported to being paid higher salaries than those in neighboring countries, such as Malaysia (Malaysian Insider, 10 January 2014). The structural factors mentioned above illustrate how existing inequalities are attributed to an economic growth that is not supported by adequate economic policies that provide smallholder farmers the opportunity to grow and develop. On the other hand, corporatism that entrusts economic power to large corporations has prompted a shift towards a more oligarchic form of economic control, concentrated only on major business elites. A development process under such circumstances is not being complemented with high quality human capital through adequate social services. Institutional Factor The institutional factor refers to the key causes of inequality (Canada Board Conference, 2012). Institutional support is crucial in the design of a country’s economic structure. Krugman (2009) holds a fairly extreme view by arguing that inequality is the result of institutional preferences, shifting norms and political bias, and not merely due to market forces. The institutional factor is reflected in various government policies, while institutional character is evident from their policy leanings; whether biased towards certain groups or capable of maintaining integrity by making equality a priority. In the book “Why Nations Fail?”, Daron Acemoglu and James Robinson (2012) shed light on the importance of political and economic institutions in promoting progress and equality. When a country opts for inclusive economic and political institutions, it will be able to create prosperity and equality. According to Acemoglu and Robinson (2012), inclusive economic and political institutions present each and every citizen the opportunity to be involved in economic and political activities without discriminatory treatment. Exclusive institutions on the contrary will only afford certain groups with such opportunities. If political institutions are in the hands of a selected few, an oligarchic structure will emerge in which they will collaborate with the economic powers (Winters, 2011). Next are the rent‐
25
seekers who constitute a group that reap economic gains without much effort or profit from information asymmetries (Stiglitz, 2012). This phenomenon of rent‐seeking economy has manifested in several sectors, including agriculture, animal farming and construction. A concrete example of rent‐seeking economy that the mass media has brought to light is the livestock sector. Despite having 14 million locally bred cattle which is the equivalent of 430,000 tons of beef, Indonesia still imports beef from Australia and Latin American countries. Following the exposure of the cartel involved in beef import corruption, the Corruption Eradication Commission (KPK) estimated a loss of IDR 18.7 trillion arising from the failed Agricultural Ministry’s beef self‐sufficiency program (PSDSK). This financial loss is calculated from the total budget allocated in the APBN (national budget) for 2009‐2014. This program in fact is intended to empower farmers and cattle breeders in Indonesia. The financial damage caused has adversely affected 6.2 million small and medium‐scale livestock breeders. (Republika, 20 February 2013). Livestock Sector In Indonesia: Corporate and Cartel Domination The animal farming industry in Indonesia still lags behind in terms of development. This is evident in the country’s reliance on imports, both for milk powder and beef. Under Indonesia’s livestock sub‐sector, the dairy industry has seen slow growth due to heavy dependence on imported raw materials. According to research conducted by the Bogor Institute of Agriculture (IPB), 70 percent of dairy raw materials are still brought in from other countries in the form of skimmed milk and cream. Fresh milk supply from domestic farmers can only meet 30 percent of the raw material demand of the dairy industry. The influx of imports following the removal of import tariffs for skimmed milk and milk powder, has allowed producers to freely choose their preferred source of raw materials which can either come from abroad or local farmers. The problem lies in the high standards of dairy manufacturers that impede local farmers from being able to supply raw materials in bulk. Furthermore, many farmers have not thought of expanding their businesses due to low prices. In the dairy sector, the Dairy Processing Industry (IPS) is an association of producers that set the price of fresh milk. IPS membership consists of PT Nestle Indonesia, PT Ultra Jaya, PT Frisian Flag, PT Sari Husada and PT Indolacto. The majority of these companies are corporations with foreign investments, including Sari Husada. To ensure an uninterrupted supply of milk, IPS has entered into a contract with cattle breeders, guaranteeing that all milk production is sold to IPS. At least 80‐90 percent of milk produced by Indonesia’s farmers is absorbed by the dairy industry but at a low price. In 2012 for example, farmers in East Java are only paid IDR 3,200‐3,500 per liter of milk. Indonesia has the cheapest fresh milk price compared to other Southeast Asian countries for the same year. In Malaysia, the average price is IDR 5,400, Thailand IDR 5,200, Philippines IDR 4,800, and Vietnam IDR 4,200 per liter in 26
2012. As all milk production must be handed over to IPS, the national industry lacks the capacity to establish its own dairy plant. Small and medium‐scale enterprises are incapable of breaking the domination of the six major dairy producers. Farmers are also powerless in terms of pricing because the National Dairy Council (DPN) has not been functioning as it should, thus giving IPS plenty of leeway to set prices. Not only in the dairy business, beef cattle farmers have also been rendered powerless in facing the livestock cartel which reflects rent‐seeking economy. A KPK study showed that 93% of Indonesian livestock farmers in fact are able to meet national beef demand, but locally produced meat will have difficulty penetrating the Jakarta market due to imported beef directly flown into the capital city. Beef from West Nusa Tenggara for example cannot enter the Jakarta market compared to the easy access of meat imported from Darwin, Australia. This constitutes a cartel as a group of people takes control over the market circulation of beef. This is not surprising due to the lucrative nature of the beef import business. From KPK’s investigation it was found that for every kilogram of imported beef, cartel players receive IDR 5,000 in commission. As a consequence, small farmers are left in a weak position, unable to compete with others who are at a more advantageous footing within the cartel system. In light of this, the national logistics system should be improved to reduce the inequitable access to distribution from the eastern to the western part of Indonesia, and vice versa. How does this rent‐seeking economy impact on inequality in Indonesia? A rent‐seeking economy encourages the concentration of financial gains to cartels and certain networks rather than the widespread distribution of economic benefits for the people. Furthermore, social programs designed for the people are no longer effective despite budget realizations for this purpose. The existence of rent‐seekers has become a phenomenon distinct to developing countries with wide economic disparities. African countries such as Zimbabwe, Uganda and Congo are classic examples of nations weighed down by chronically exclusive economic and political institutions. Indonesia during the New Order regime and the Philippines under Marcos rule are other examples in Southeast Asia. The economic crisis in Indonesia followed by the country’s political turmoil eventually led to their demise. When conditions have not become too chronic, remedial efforts are possible by improving the political and economic systems. According to Acemoglu and Robinson (2012), if there is the need to prioritize, efforts to create inclusive, democratic political institutions could be given precedence. The institutional factor is also essential in promoting policies aimed at reducing inequalities, for example through innovative tax instruments. With a democratic political and economic system in place, taxes can serve as an effective means to ensure an evenly balanced growth (Antara News, 5 September 2013). The Way Forward 27
Indonesia’s remarkable economic growth of late followed by widening income inequalities in society is an indication of the country’s flawed development concept. The Gini index at 0.42 is the worst since Indonesia gained independence. This means that progress achieved in the business sector in aggregate has failed to heighten the collective well‐being of the people which is one of the goals that the State should uphold. What policies can be promoted to reduce inequalities? First, equality is crucial either through the redistribution of assets, land or income, or taxation. Tax instruments have thus far not been given due attention from the government as a means to narrow social disparities. Second, the government should specifically pay heed to marginalized groups and micro entrepreneurs, including farmers and fishermen, whose well‐being relies on natural resources, particularly with regard to business and technological development. Third, the government needs to strengthen social policies that allow the people to attain higher levels of well‐being. Fourth, the government should systematically empower the poor and local communities. Fifth, the government ought to seriously work towards creating equal opportunities for economic activities pertaining to access to capital and financing for micro and informal businesses. Inequalities can also be reduced by adopting a sectoral approach. For Indonesia, specific attention should be given to the agricultural sector which employs 39% of the labor force yet only contributes 13% to GDP. These figures have experienced a declining trend over time as reflected in agricultural sector growth at an average of 2.2%, lower than GDP growth even though agricultural investments have increased. Furthermore, limited land ownership for farmers also poses a serious challenge for the country’s agricultural sector, making agrarian reform an increasingly pressing agenda. In addition, gender‐based poverty reduction efforts also need to be scaled up. Women should have better access to education, health care, poverty alleviation programs and micro‐credit, and to be more involved in household economic activities in order to improve their standard of living. Various measures to deal with inequalities need to be undertaken seriously through a more effective development paradigm. Development ultimately is not about accumulating economic gains. Human capital is in fact the nation’s essential asset. The main development purpose is to create environments conducive for the people to lead better lives, in terms of health, education, housing and productive activities. 28
References – Acemoglu, D., Robinson J. Why Nations Fail, The Origins of Power, Prosperity and Poverty. London : Profile Book Ltd. 2012. – Antara News. ‘Takaran Pajak Harus Jelas’. 5 September 2013. – Alderson, A. ‘Globalization and U Turn’. Paper for Social Stratification Research Committee (RC 28) of the International Sociological Association in Mannheim, Germany , 26‐28 April 2001. Downloaded from: http://www.unc.edu/~nielsen/soci850/odocs/ajs01.pdf – Badan Pusat Statistik. ‘Nilai Tukar Petani’. 2014. Downloaded from : http://www.bps.go.id/menutab.php?tabel=1&kat=2&id_subyek=22 – Berita Satu. ‘KPK Temukan Banyak Kartel Sapi di Indonesia’. 9 September 2013. Downloaded from : http://www.beritasatu.com/nasional/137031‐kpk‐temukan‐
banyak‐kartel‐sapi‐di‐indonesia.html – De Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in the West and – Fails Everywhere Else. Basic Books. 2003. – Hill, Hal. ‘Globalization, Inequality, and Local Level Dynamism : The Case of Indonesia and the Philippines’ in Asian Economic Policy Review Vol. 3 No.1 June 2008. Tokyo : Japan Center for Economic Research. 2008. – International Monetary Fund. ‘Indonesia : Selected Issues’ in IMF Country Report No. 11/310. Washington DC : IMF. 2011. Downloaded from : http://www.imf.org/external/pubs/ft/scr/2011/cr11310.pdf – Kompas. ‘LIPI : Indonesia Menuju Deindustrialisasi’. 22 December 20100. – Krugman, Paul, in Wilkinson Richard & Pickett Kate. The Spirit Level: Why – Equality is Better for Everyone. London : Bloomsbury Press. 2011. – Malaysian Insider. ‘Kadar Naik Gaji Malaysia 2.6%, Indonesia 10%, Dakwa Rafizi’. 10 January 2014. – Milanovic, B. World Income Inequality, Is the World Becoming More Unequal? Toronto : The Conference Board of Canada. 2013. Accessed from http://www.conferenceboard.ca/hcp/hot‐topics/worldinequality.aspx – Prayoga,’Anatomi Konflik antara Korporasi dan Komunitas Lokal’. Jurnal Makara Sosial Humaniora. Vol. 14 No. 1 July 2010. Depok : University of Indonesia. – Pricewaterhouse Coopers. World in 2050, The BRICs and Beyond: Prospect, Challenges and Opportunities. Pricewaterhouse Coopers. 2013. Accessed from http://www.pwc.com/en_GX/gx/world‐2050/assets/pwc‐world‐in‐2050‐report‐
january‐2013.pdf – Rand Institute. Indonesia Family Life Survey. in Davies J.B., Sandstrom S., Shorrocks A.B., Wolff E.N.The Level and Distribution of Global Household Wealth, NBER Working paper Series, Washington DC : National Bureau of Economic Research. 2009. – Republika. ‘KPK : Ada Mafia Kartel di Perdagangan Sapi’. 20 February 2013. – Tambunan, Tulus. ‘A Survey of Business Models for Agricultural Investment in Indonesia’. TKN Report December 2012. Manitoba : International Institute for Sustainable Development. 29
– Technology Indonesia. ‘Indonesia Mengalami Deindustrialisasi’. Downloaded from : http://www.technology‐indonesia.com/ict/layanan‐informasi/106‐indonesia‐
mengalami‐de‐industrialisasi – United Nations Development Program. Human Development Report 1996. New York : UNDP & Oxord University Press. 1996. – World Bank. The Indonesia Competitiveness Report 2011 : Sustaining the Growth Momentum. World Economic Forum. 2011. Downloaded from : http://www3.weforum.org/docs/WEF_GCR_Indonesia_Report_2011.pdf – Wickramasinghe, Upali, et.al. (ed.) ‘The Role of Policies in Agricultural Transformation – Lessons from Brazil, Indonesia and the Republic of Korea’ in UNESCAP Working Paper No. 106. Bogor : CAPSA & UNESCAP. 2012. Downloaded from : http://www.uncapsa.org/publication/WP106.pdf – Wilkinson, Richard & Pickett Kate, (2011), The Spirit Level: Why Equality is Better for Everyone, Publisher: Bloomsbury Press. – Yusuf, Arif Anshori. ‘Recent Trend in Inequality in Indonesia’ presented at the INFID Workshop on Inequality. 18 December 2013. Jakarta. 30
Effectiveness of Poverty Reduction Policies and Programs By: Tursia Abstract Poverty remains to be an unfinished agenda that the government cannot afford to partially deal with. It should be meticulously examined in detail, from its root causes to viable solutions. The confusion and ambiguity, pros and cons, and all other issues arising from poverty reduction efforts, including with regard to the institutional and policy dimension can be minimized from the outset in order to prevent new problems from surfacing. Synergies and coordination among state ministries are the cornerstone for effective implementation of poverty reduction programs in Indonesia. The issue of poverty is not simply about the sum and percentage of the poor. A whole list of other dimensions need to be factored in, one of which is the depth and gravity of poverty. Apart from effectiveness in reducing the number of poor people, anti‐
poverty policies should also be able to narrow the rich‐poor gap, reduce the depth and gravity indices, and explain the root cause of poverty. Only then will policies be able to bring forth programs genuinely oriented toward alleviating the poverty situation. Laws and regulations on which poverty reduction programs are based on should ideally be complemented with accurately targeted implementation in a measurable and sustainable fashion to ensure that these programs do not merely address seasonal poverty13 (poverty as a result of certain conditions). 13
Type of poverty according to time patterns, Ginandjar Kartasasmita in Ridlo (2001:11) 31
CHAPTER 1 Introduction Poverty Reduction Programs in Indonesia Poverty has long been an oft‐discussed phenomenon that has sparked stimulating debates. It is often equated as an individual’s inability to meet his or her minimum standard of living. Poverty essentially is a social phenomenon not exclusive to developing nations such as Indonesia, but is also an issue that persists in more economically advanced countries with better living standards. This phenomenon has drawn immense attention, galvanizing global movements that have permeated into the humanitarian response domain. In 1995, the World Summit on Social Development in Copenhagen has included the issues of poverty, unemployment and social exclusion as key areas of concern. Indonesia’s 1945 Constitution places poverty as one of the country’s priority agendas14. Alas, poverty remains to be an unrelenting issue for Indonesia. Absolute poverty may show signs of abating since the 1990s15, but those on the brink of the poverty line are vulnerable of slipping back into destitution. The number and percentage of poor people from 1996 to 2008 has fluctuated over time, despite a declining trend in 2000‐2005. From 1996 to 1999, an additional 13.96 million people who were affected by the economic crisis have joined the ranks of the poor, making it a total of 47.97 million people living in destitution in 1999 compared to 34.01 million in 1996. In terms of percentage, the poor population swelled from 17.47% to 23.43% for the same period. In 1999‐2002, at least 9.57 million people have escaped poverty which means a drop in poverty headcount from 47.97 million people in 1999 to 38.40 million in 2002. The proportion of the population living in poverty also shrunk from 23.43% in 1999 to 18.20% in 2002. From 2002 to 2005, another 3.3. million people have crossed the poverty line, signifying a further reduction from 38.40 million people in 2002 to 35.10 million people in 2005. In relative 14
Article 28H (1), 1945 Constitution stipulates that every person is entitled to lead full and satisfying lives, mentally and physically, to decent housing and a safe and healthy environment, and the right to health care. In Article 35 clause 2, the “State shall develop a social security system for every citizen and empower the weak and underprivileged to honor their diginity as human beings”. 15
Poverty statistics saw a downward trend from 47.97 million or 23.43% by the end of 1990 to 30.02 million or 12.49% in 2011, and fell further to 28.07 million people or 11.37% (TNP2K, 2013). Since 1994, the government of Indonesia has developed a wide range of poverty reduction programs to provide social protection to its citizens. Over the years, programs have evolved from the Underdeveloped Village Program (IDT) introduced in 1993‐1997 to the Family Welfare Development Program implemented from 1996 to January 2003. Other smaller scale anti‐poverty programs were also launched, such as the program on increasing the income of small‐scale farmers/fishermen (P4K) carried out in 1997‐
2005. In 1998, the sub‐district development program (PPK) and urban poverty reduction program (P2KP) were developed to empower urban communities. 32
terms, the percentage of the poor decreased from 18.20% in 2002 to 15.97% in 2005. In 2005‐
2006 however, the number saw an increase from 35.10 million in 2005 to 39.30 million people in 2006, or 35.10 million more poor people, thus a corresponding increase in percentages from 15.97% to 17.75%. From 2006 to 2008, the number of poor people decreased to as many as 4.34 million people, making it a total of 34.96 million people in 2008 from 39.30 million in 2006. This has lowered the percentage from 17.75% to 15.42% for the same period. These fluctuating poverty levels were mostly triggered by the social and political situation at the time. From 1980 to 1990, the government initiated several anti‐poverty programs in response to the social crisis, risks and turmoil blighting the country. These programs were then recognized as social safety nets, but eventually evolved in line with the development of other global issues from merely being safety nets to more caritative and comprehensive programs through the social protection agenda (Barrientos & Hulme, 2008; Holzman, 2001). During the 1990s, the government developed a wide range of poverty reduction programs to provide social protection for its citizens. Over the years, programs have evolved from the Underdeveloped Village Program (IDT) introduced in 1993‐1997 to the Family Welfare Development Program implemented from 1996 to January 2003. Other smaller scale anti‐
poverty programs were also launched, such as the program on increasing the income of small‐
scale farmers/fishermen (P4K) carried out in 1997‐2005. In 1998, the sub‐district development program (PPK) and urban poverty reduction program (P2KP) were developed to empower urban communities. The social protection agenda should be able to deal with the root cause of poverty, instead of only scratching the surface and addressing symptoms (World Bank, 2001). A slew of laws and regulations were issued following the economic crisis in 1998. Since then, numerous poverty reduction programs have been introduced. To strengthen the implementation of these programs, the government has issued the Law on National Social Security System (UU SJSN)16. There was high expectation for these programs to effectively reduce poverty rates. In reality however, the poverty level rose from 11.37% to 11.47% in 2013 (March 2013). This was higher than the target set in the national budget to lower poverty rates to 9.5% ‐10.5%. 16
Law No.40/2004 sets out the implementation mechanism of different forms of social security schemes that include health insurance, occupational accident insurance, retirement insurance benefits and life insurance provided universally to citizens to be implemented by the Social Security Agency. 33
45
40
35
30
25
20
15
10
5
0
3
36.15
35.10
39.30
17
37.1
34.96
2.53 31.02
32
30.02 29.13
3 28.07 28.55
11,5‐
1
17.75 16
12,5‐13,512,5
6.58 15.42
1
16.66 15.9
97
3 12.49
1
14.15 13.33
11.47
96 11.37
11.9
10,5‐
11,5
Ju
umlah Pendudu
uk Miskin
Persentase P
Penduduk Miskkin
8,0‐10,0
9,5 ‐
10,5
Targeet Tingkat Kem
miskinan
Source: BPS, 201
13 These T
fluctu
uating ratess are due to t the economic crisis and fuel p
price hikes, and partlyy also attributed a
to the impact of climatte change. T
The most profound p
ramification has h been on
n the prices p
of baasic commodities such as rice and
d vegetabless which forr the poor make m
up 74
4% of total t
househ
hold spend
ding. This percentage is i obtained from econ
nomic calcu
ulations that put more m
weigh
ht on purch
hasing poweer. The classsification of o poverty should therefore takee into account the a
buying pow
wer, in addittion to otheer factors. In 2010, thee governmeent through TNP2K (Naational Team
m for Accelerating Pov
verty Reducction) 1 . To has envision
h
ned to loweer the poverrty rate to 8
8% ‐ 10% by
y the end off 2014 (TNP
P2K, 2013)17
this end, the
t
e government has increeased the am
mount of so
ocial aid from
m year to year, totalingg IDR (US$ 3.3 biillion). This is indeed aa substantiall amount fo
29.7 trillion
2
or a newly laaunched ageenda. It accounts for 2.6% of o the national budget in 2010 (W
World Bank
k, 2012). Th
he amount later surged to ID
s
DR 52.4 trilliion in 201318. Poverty in I
P
Indonesia: A Reality C
Check Over O
60 milllion peoplee subsist on
n less than $ 1/per day. This is n
not solely du
ue to scarciity of employmen
e
t opportun
nities, but also a
as a rresult of sttructural isssues and absence off any guarantee fr
g
rom the Statte in uphold
ding the peo
ople’s fundaamental righ
hts. Being poor in Indon
nesia means leadi
m
ing life at itss most difficcult. Havingg to bear burrdens that tthey can harrdly carry w
which for f the poorr means a day‐to‐day d
struggle to survive. Ev
ven the mid
ddle‐class iss increasinggly at risk r
of enteering povertty. In the event of a ccrisis, peoplle will be caught in th
he domino eeffect which is mo
w
ostly beyond
d their contrrol. 17
To meet this poverty reducction target, th
he governmentt has made bud
dget projection
ns for financingg the necessarry anti‐
poverty progra
p
ms. 18
Priority is givven to 3 progrrams: temporaary cash transffer (BLSM), subsidized rice fo
or the poor (rraskin) and Fam
mily of Hope Program H
(PKH) that com
me under clustter I for povertyy reduction. 34
In almost every problem related to the people’s basic needs, such as education, health care and livelihoods, the State appears to be conveniently absent, leaving the people under dire circumstances, expecting them to crawl out of the situation themselves. The easiest way out for most people living in poverty in Indonesia is to borrow from a moneylender or closest relative who usually also struggle to get by. The poor will therefore remain penniless, deprived of access to much‐needed services from the government. Another equally disturbing poverty issue concerns over more than 10 million neglected children in Indonesia, many of whom are abused and trafficked, while 26 million children (primary education) have dropped out of school. Most of them live in remote areas, unreachable and unserved by government programs. Furthermore, disability issues have also come to the surface in an increasingly complex manner. Social exclusion (isolated indigenous communities, people with HIV/AIDS), and issues related to the homeless, physically handicapped and hearing impaired are cause for serious concern yet has not been given due attention by the government. The number of persons with disability has now reached 2,429,708 people or 1.2% of total population who are denied of adequate services. With their physical shortcomings, they are forced to struggle in order to cope with life. Another issue concerns natural disasters and the considerable number of people affected by them. Not to mention discrimination against women and stigmatization made worse by a development paradigm that has not been favorable towards women and the poor. Statistics will continue to rise unless the government makes a thorough analysis and evaluation of the situation by involving the poor as the target group in the program planning process. Government‐initiated poverty reduction programs are typically transient in nature. Nearly all existing programs (e.g., raskin and BLSM) deal only with the people’s inability to buy basic commodities, instead of broadening the scope to include other basic needs such as education19, health care and livelihoods, primarily with regard to much‐needed capital. Poverty reduction in Indonesia has clearly deviated away from its main purpose of creating a prosperous nation as enshrined in the 1945 Constitution20. The government of Indonesia should measure social welfare with regards to several indicators related to public services: 1.
2.
Educational attainment Health status 19
In reality, the beneficiaries of programs that focus on the education sector such as BSM and on household welfare such as PKH are not accurately targeted. 20
Article 33, 1945 Constitution reads “(1) The economy is to be structured as a collective endeavor based on familial
principles. (2) Production sectors which are vital to the State and which impact on the livelihoods of many shall be under
the control of the State. (3) Land and the waters, and natural riches therein shall be controlled by the State for the wellbeing of the people to the greatest extent possible. (4) The national economy shall be administered based on economic
democracy consistent with the principles of togetherness, efficiency by upholding justice, sustainability, environmentally
conscious and self-reliant, by maintaining the balance between national economic progress and unity”. This is
reinforced by subsequent Article 34 that reads: “(1) Indigent persons and abandoned children shall be taken into care
by the State. (2) The State shall develop a social security system for all and empower the weak and underprivileged in
preserving their dignity as human beings. (3) The State shall be responsible for making available proper health care and
public service facilities”.
35
3.
Clean water availability 4.
Sanitation, individual and neighborhood level 5.
Asset ownership, primarily housing 6.
Use of electrically powered equipment (including access to technology). All six indicators should be the basis for the government to measure the level of social welfare. The government however does not include economic indicators, including access to capital in gauging the people’s well‐being. This component in fact is crucial for determining the extent to which capital and economic access can help lift a person out of poverty. In reality, the six indicators are only applied in relation to infrastructure development, instead of access for poor communities. Despite being included as one of the welfare indicators that the government must meet, education remains to a critical issue for Indonesia. This is reflected in Indonesia’s Education for All (EFA) Development Index which has continued to decline over the years21. Falling school enrolment rates are attributed to the continual increase in dropout rates. Furthermore, inaccessibility and poor infrastructure are core issues that Indonesia’s education sector needs to deal with. The situation is worsened by unfavorable regional conditions and inequitable distribution of educators22. This has made it difficult for Indonesia to meet its education sector targets. Educational facilities in isolated regions are also unevenly dispersed. The country’s poverty enclaves are mostly found in these far‐flung areas (inaccessible areas such as forests and mountainous regions). Apart from education, another equally important welfare indicator is health status. Based on field data, maternal mortality rates have reached alarming levels23. This is due to limited access to health facilities and government health programs. Many regions in the eastern part of Indonesia (NTT, NTB and Papua) have to make do with extremely minimum health facilities, including referral hospitals, with severe shortages of health workers. Another indicator that warrant more government attention concerns the availability of potable water, sanitation, asset ownership and access to technology. The government has indeed introduced programs to deal with these issues, yet in reality service providers related to all six welfare indicators have been privatized, making access more difficult and unaffordable for the poor. Anti‐poverty policies have failed to extricate the underprivileged from poverty, but have instead aggravated the poverty situation mainly because government programs are merely curative interventions that are not carried out in a simultaneous or sustainable manner. Many factors contribute to poverty, including the following: 21
In 2010, Indonesia was ranked 65th position in terms of EFA and in 2011 slid to 69th place from among 127 countries. Based on education data in 2010, some 1.3 million children aged 7‐15 have dropped out of school. 22
Based on data from the Indonesian Ministry of National Education, there are 899,016 primary school classrooms of which 293,098 are damaged. This means that only 605,918 classrooms in primary schools can be utilized. Lower secondary schools in Indonesia have a total of 298,268 classrooms from which 125,320 are in poor condition, leaving only 172,948 functioning classrooms. In terms of school teachers, there is a 21% shortage in urban areas, 37% in rural areas and 66% in remote areas. 23
In 2010, maternal deaths reached 288 per 1000 live births and rose to 359 per 1000 live births in 2011. The target by 2015 is 102 deaths per 1000 live births. 36
1.
2.
The poor are voiceless and powerless in facing state institutions and society at large Vulnerable to economic turbulence and incapable of dealing with it. The inability to make their voices heard refers to the lack of opportunities for the people to oversee and evaluate government programs. Despite the government making available to the people a mechanism known as musrenbang (development planning deliberative forums), it has merely been a formality with no room for evaluation and monitoring. The development planning process should ideally be part of public control of government performance. In reality, the people’s role and control function in the development planning process is merely ceremonial to comply with requirements, and not oriented towards substantive matters for effectively overseeing the development process. In nearly all regions across Indonesia, musrenbang has evolved into a negotiation arena for personal gain among the elite few from the village to provincial level. Even if the people are allowed to become part of development control, for example by reporting on irregularities and misappropriations, all too often they are instead the ones having to face the law which will only further complicate their situation. As a consequence, the people are reluctant to carry out their control function which in turn have resulted in inaccurately targeted anti‐poverty programs that do not meet the people’s needs. 37
CHA
APTER II POLITICS
S AND POVE
ERTY REDU
UCTION PO
OLICIES AND
D PROGRAM
MS A.
A
Polittics and Strrategy In the annalls of Indoneesia’s develo
opment histtory, povertty reduction
n policies an
nd program
ms are nothing new
n
w. Government attemptts at reducing poverty are manifessted in the issuance of f laws and regulati
a
ions as supp
porting toolls. These effforts howev
ver have nott been effecttive in curtaailing poverty, and
p
d whatever progress acchieved hass been at snaail’s pace. T
The Worldfaactbook, BPSS and World W
Bank
k found th
hat the num
mber of po
oor people in Indoneesia has falllen faster than Cambodia, T
C
Thailand, Ch
hina and Braazil that hav
ve only man
naged to reggister a 0.1%
% annual drrop in poverty p
ratees. Indonesia claimed to have been able to lower the n
number of poor p
population 2
24
from 2005 t
f
to 2009 at a rate of 0.8%
% per year. Source: Wor
S
rldfactbook
k, BPS, and W
World Bank
At the intern
A
national lev
vel, poverty reduction h
has become a pressing issue in linee with the gglobal commitmen
c
nt to achieve the Millen
nnium Deveelopment Goals G
(MDGss), one of which w
is to bring b
24
In the povertty reduction aggenda of Indon
nesia’s 2nd Uniited Ministerial Cabinet. 38
poverty rates down globally25. This is also consistent with Indonesia’s development agenda laid down in the National Medium‐Term Development Plan (RPJMN) for 2010‐201426. RPJMN 2010‐2014 has set the following economic development targets which include improving the people’s welfare: 1.
2.
3.
Economic growth projected at 7.0% – 7.7% in 2014 Reduce unemployment rates to 5% – 6 % by end of 2014 Reduce poverty rates to 8% – 10% by end of 2014 RPJMN and RKP (government work plan) refer to the ten Presidential Directives presented before the working meeting with ministers, governors as well as economic and technology experts held at Tampak Siring Palace (Bali) in 2010: (1) higher economic growth; (2) reduce unemployment rates by creating more employment opportunities; (3) reduce poverty rates; (4) increase income per capita, (5) maintain economic stability; (6) increase domestic financing; (7) enhance food and water security; (8) enhance energy security; (9) improve competitiveness of national economy; (10) promote an eco‐friendly economy27 (2nd United Ministerial Cabinet’s Poverty Reduction Program, Ministry of Communication and Informatics, 2011). Nearly all programs and policies introduced by the government have yet to generate optimal results. RPJMN has in fact adopted SNPK (National Poverty Reduction Strategy) as a document crafted for the actualization of vision and mission statements under the incumbent President. SNPK serves as a national strategy document which entails the obligation of every local government at the provincial, city and district level to draw up their own Regional Poverty Reduction Strategy (SPKD)28. SPKD is expected to bring forth strategy formulations by key stakeholders at the sub‐national level on how best to tackle the poverty situation according to local context. Poverty reduction efforts will therefore be structured around local characteristics. The strategy document also sets out certain aspects related to process and substance. In terms of process, SPKD should be formulated in adherence to agreed principles and preconditions such as participatory processes engaging multi‐stakeholders. With regard to substance, SPKD should draw up policies in favor of the poor by duly accommodating their needs and aspirations. Alas, not all regions have established an SPKD document. The district of Jembrana for example has only 25
In Indonesia, government commitments among others are manifested through the National Poverty Reduction Strategy (SNPK) and the establishment of a special agency responsible for ensuring that poverty reduction targets are met. The agency is known as the Poverty Reduction Coordination Team (TKPK). 26
RPJMN will be spelled out through the annual government work plan (RKP). RKP 2010 focused on “Recovery of National Economy and Developing People’s Welfare”. The overarching development theme for RKP 2011 was “Accelerating Fair and Balanced Economic Growth Supported by Good Governance and Central‐Local Synergy”. 27
In regard to this, the government has devised three development strategies: (1) pro‐growth to boost the economy through investments, therefore the need to improve the investment climate by enhancing the quality of government spending through exports and increasing consumption; (2) pro‐job to ensure that economic growth creates the widest possible employment opportunities by prioritizing labor‐intensive investments; (3) pro‐poor to ensure that economic growth curtails the number of poor people to the greatest extent possible by improving the social protection system, broadening access to basic services and empowering the people. 28
SPKD is a document prepared at the sub‐national level in compliance with Presidential Regulation No. 15/2010 on the need to speed up progress in alleviating the poverty situation in Indonesia. 39
begun to prepare the document in 2013. This means that anti‐poverty programs undertaken by Jembrana are merely a political strategy for the ruling elite to continue to stay in power. Due to its binding nature which makes it compulsory to promote participatory processes, regions are expected to establish a special team for implementing poverty reduction programs known as TKPKD29, a cross‐sectoral forum involving relevant parties for the purpose of coordinating and aligning strategies, policies, programs and activities to ease the poverty situation at the sub‐national level. TKPKD is to be established in provinces, districts and cities. The government has issued a policy on the National Social Security System (SJSN). Social protection should work towards seeking answers to the root cause of poverty, instead of simply scratching the surface and dealing only with symptoms (World Bank, 2001). An array of anti‐poverty programs were subsequently launched. To bolster poverty reduction efforts, the government enacted the SJSN Law30. In its implementation however the law is not immune to problems. It has incited public protests and on several occasions has been challenged at the Constitutional Court. Public resistance towards the law primarily concerns the imposition of a compulsory fee in order to be covered by the social insurance scheme, thus shifting government obligation to provide universal social security upon citizens and the private sector, and this may create differential treatment in accessing services31. This welfare scheme was no longer heard of amid other programs rolled out by the government. However, by the end of 2013 and early 2014, SJSN resurfaced through a new scheme known as JKN (National Health Insurance) managed by BPJS. Likewise, there are pros and cons to the JKN program. Its financing mechanism is considered to be irrelevant and the claims procedure too complicated. This scheme (specifically on health care) is touted to be the cornerstone of the national social protection agenda as part of the government’s commitment to allow the nation to prosper, and as a consequence has the obligation to deliver public services of the highest quality. Existing social protection programs however have strayed away 29
TKPKD is established in pursuant to the following legislation: Law No.17/2003 on State Finances, Law No.25/2004 on National Development Planning System, Law No.32/2004 on Regional Governments, Law No.33/2004 on Fiscal Balance between Central and Regional Government, Government Regulation No.72/2005 on Rural Areas, Government Regulation No.73/2005 on Urban Wards, Government Regulation No.17/2005 on Medium‐Term Development Plan 2004 – 2009, Government Regulation No.54/2005 on Poverty Reduction Coordination Team, Home Affairs Ministerial Circular Letter No.412.6/3186/SJ on Follow‐Up to Government Regulation No.54/2005 on Poverty Reduction Coordination Team, and Ministerial Decree, People’s Welfare Coordinator acting as Head of Poverty Reduction Coordination Team No.052/KEP/MENKO/KESRA/II/2006 on Basic Guidelines and Working Group for the Poverty Reduction Coordination Team. Not all regions however have set up their own TKPKD , nor do they fully understand the function of TKPKD. In several regions (Garut, Ciamis, Tasikmalaya, Sukabumi, Jembrana, Subang, Serdang Bedagai, South Sulawesi and NTB) TKPKD has only been in operations since 2010. 30
Law No.40/2004 outlines the procedure for implementing social security programs that cover health insurance, occupational accident insurance, old‐age benefit, retirement insurance benefit and life insurance provided universally to all citizens and to be implemented by the Social Security Agency. 31
See Constitutional Court Decision No. 50/PUU‐XIII/2010). The Constitutional Court however ruled against the petition for a judicial review by arguing that “even though the 1945 Constitution expressly stipulates on the obligation of the State to develop a social security system, it does not however make it mandatory for the State to adopt or prefer a specific system for developing the said social security system”. Concerning this, the 1945 Constitution, Article 34 clause (2) only lays down the constitutional criteria which also serves as the main purpose of the social security system that the State should develop, which refers to a universal system for the purpose of empowering the weak and underprivileged to preserve their dignity as human beings. 40
from the original purpose and substance of the agenda. This is reflected in the inclination to pass on State obligation to the private sector or the people, the commercialization of public services and reduction of obligation to deliver these services. B.
Poverty Reduction Policies and Programs The social protection concept in Indonesia is translated into two key models: 1. Social Security is a program initiated to provide social protection to the people through a paying mechanism such as jamkesmas (public health insurance) and worker’s protection. This means that jamkesmas is also part of social protection specifically for non‐paying participants. 2. Social Protection is a program initiated to provide social protection for the poorest of the poor in a bid to fulfill their fundamental rights such as for health care, education and sanitation. Programs under the social protection category include BLSM, PKH, BSM, raskin and jampersal (maternity insurance), a derivative of the jamkesmas program. From these two models, the implementation of anti‐poverty programs in Indonesia is based on policies drawn up by the government to meet poverty reduction targets. The government has introduced a broad range of programs claimed to be part of government effort to lower poverty levels by grouping poverty reduction programs into several clusters: 1. Cluster 1 consists of household‐based integrated social assistance for easing the burden of poor families by increasing access to health care, education, clean water and sanitation (PKH, BOS, BSM, Jamkesmas, Raskin, BLSM) 2. Cluster 2 refers to poverty reduction efforts through community empowerment in order to develop the potential and capacity of poor communities to engage in the development process consistent with the principles of empowerment (PNPM or the national community empowerment program)32. 3. Cluster 3 aims to reduce poverty by empowering micro and small‐scale enterprises with better economic access and capacity (microfinance and collective enterprises) 4. Cluster 4 focuses on measures that help promote and scale up pro‐people programs.33 32
Cluster 2 has the most variants including PNPM Mandiri Perdesaan (rural development program), PNPM Perdesaan R2PN (Rehabilitation and Reconstruction of Nias Island), PNPM Mandiri Agribisnis/SADI (Smallholder Agribusiness Development Initiative), PNPM Generasi Sehat dan Cerdas (PNPM‐Healthy and Learned Generation), PNPM lingkungan Mandiri Perdesaan (PNPM‐Rural Environment), Participatory Development System (P2SPP) or known as PNPM Integrasi, PNPM Mandiri Respek (Village Development Strategic Plan) for the people of Papua, PNPM Mandiri‐Rural Infrastructure, Regional Socio‐Economic Infrastructure Development (PISEW), Community‐Based Clean Water Supply Program (PAMSIMAS), PNPM Mandiri‐Underdeveloped Areas and acceleration of the development of underdeveloped and special regions (P2DTK), PNPM Mandiri‐Maritime and Fisheries (PNPM‐Mandiri KP), PNPM Mandiri‐Tourism, PNPM Mandiri‐Housing and Settlement. Under Cluster 2, programs are also introduced for expanding and developing job opportunities or labor‐intensive enterprises. The government recently launched PNPM Peduli that focuses on serving community groups that other PNPM programs are unable to reach. 33
This program was launched in accordance with Presidential Decree No.10/2011 on Coordination Team for Promoting and Broadening Pro‐People Programs through (1) low‐cost housing (2) affordable public transport (3) clean water supply (4) affordable and economical electricity supply (5) improving the lives of fishing communities (6) improving the lives of the urban poor. 41
CHAPTER III POVERTY REDUCTION POLICY IMPLEMENTATION AND IMPACT A.
Cluster Implementation: The Reality From all four clusters, Cluster 1 is the only one that does not emphasize on physical or infrastructure development compared to the other three clusters. Poverty reduction programs should be consistent with RPJMN 2010‐2014 and the ten resolutions reached by the presidential working meeting with cabinet ministers held in Bali. The government’s half‐
hearted attempts at realizing its policies through programs of which physical infrastructure development appears to the focal point are exacerbated by poor coordination and lack of synergy. Field findings on the implementation of Cluster 1 are as follows: 1) mistargeted program beneficiaries (many of whom are in fact undeserving of assistance 2) discrepancy in actual amount of aid distributed and the amount promised. In several regions, programs under Cluster 1 are meant to minimize conflict (distribution of subsidized rice), while inconsistencies have been detected in the implementation of PKH program with regard to the amount of aid received 3) lack of sensitization to beneficiaries at the village level which has led to inconsistencies on who should be eligible to receive aid 4) women‐household heads have difficulty accessing assistance provided by poverty‐reduction programs, while many poor households have not obtained their social protection cards. Clusters 2, 3 and 4 on the other hand place priority on programs related to physical infrastructure development34. Another issue observed on the ground concerns data accuracy in terms of inclusion error (those who do not meet the beneficiary criteria but are included in the list of recipients) and exclusion error (poor individuals who should be registered as beneficiaries but are not). The percentage of exclusion error is considerably high. In Jakarta and many other regions, it is commonplace to find indigent persons who are excluded from receiving direct assistance. Another glimpse of reality in Indonesia’s poverty situation is the fact that poverty wears a woman’s face. Nearly all policy‐making processes, at the village to national level, remain gender biased and unsupportive of women’s needs and aspirations. This is reflected in women’s low attendance in musrenbang only reaching less than 30%. In Serdang Bedagai, South Sulawesi, Garut, Sukabumi, Ciamis, Tasikmalaya, Subang, Bandung, Jembrana and Kupang City35, women household heads have difficulty accessing poverty reduction programs under any cluster. These women would typically run into problems when accessing health insurance (most of whom do not earn any income to pay for administration fee for the application process) or capital assistance (microfinance or setting up collective 34
With the exception of the SPP program which is part of Cluster 2 but does not focus on physical infrastructure development. 35
SAPA (Strategic Alliance for Poverty Alleviation) program under the Ministry of People’s Welfare prioritizes on women’s participation in the planning and budgeting process at the village to district level. 42
enterprises) primarily because one of the requirements is having a bank account. Most women household heads cannot apply for loan as it would mean the ability to provide collateral. Numerous international studies, such as research conducted by the Asian Development Bank (2013), found that social protection programs have no significant impact to women. The number of female beneficiaries are much less than their male counterparts for all three social protection programs, primarily for social insurance coverage, because women have more limited access to employment opportunities in the formal sector. The social protection index (SPI) for women is only 41.8% for the three social protection programs for both male and female (ADB, 2013). B.
Poverty Reduction Programs and Institutional Issues The state of powerlessness facing the poor is reflected in the following three core issues: 1. Poor communities lack access to decision and policy‐making processes. Existing institutions such as musrenbang or other deliberative forums cannot be relied on for the common people to channel their opinions and aspirations. Institutions such as TKPD and SKPD have unilaterally identified and defined what the poor needs by determining the program format, including what programs to implement. This hampers innovation and discourages vital feedback that can help tangibly deal with the people’s needs. As a consequence, poverty will remain to be unfinished business. 2. Government policies give precedence to economic interests and large‐scale capital investments that focus on industrial sectors not oriented to existing potential and resources. This leaves the people with no opportunity to develop their potential that can help them escape poverty. In order to bring poverty to an end, the government needs to have a regulatory framework in place in order to guarantee the people the opportunity to innovate and develop as a way out of poverty. 3. Policy‐making and implementation has not been transparent and open, making these policies accessible to a selected few. Regulations are drawn up and imposed by policy‐
makers without engaging the poor. Furthermore, the political elite’s tight grip on power at the village to national level adds to the long list of causes perpetuating poverty. It is commonplace to see the power elites or those in the inner circle of policy‐makers to be the ones enjoying the privileges of anti‐poverty programs in rural and urban areas. In certain regions, social assistance mostly does not reach the hands of the poor, but instead ends up in the pockets of those not entitled to such aid. From field data on poverty reduction programs, several factors impede their effective implementation including data accuracy, access to programs, program impact on the well‐
being of beneficiaries, power relations, weak evaluation and field monitoring, and negligible public participation (Ahmadi, et.al. 2010; Hastuti 2013; Holmes & Jones, 2010). Coordination is also an issue given the inter‐agency sectoral ego that remains high in the respective government implementing agency (SKPD) and other technical implementers. To maximize institutional function and create synergies, the government has issued a national policy – Presidential Regulation No. 15/2010 – to emphasize on the need to accelerate poverty reduction efforts in Indonesia. The presidential regulation puts pressure on provincial, district 43
and city governments to prepare an integrated program package to prevent relevant agencies or institutions from going their separate ways and avoid partial implementation of programs. To promote effective inter‐agency partnerships, Home Affairs Ministerial Regulation No. 42/2010 was issued concerning the coordination team for poverty reduction efforts at the province and district/city level. This policy foresees the risk of inefficiencies and counter‐
productivity in engaging multi‐stakeholders in anti‐poverty programs. Hence the need for stringent, well‐defined policies at the sub‐national level. The Governor of East Java for example responded by issuing Decree No 465.05/kep.1483‐Bapp/2010 on Provincial TKPKD. This gubernatorial decree serves as the legal basis for SKPDs within the East Java provincial government to launch a range of poverty reduction programs. These programs however are introduced in a partial manner, despite the establishment of a coordination team that directly oversees work jointly conducted by SKPDs. As a result, programs undertaken by SKPDs are often inconsistent with the anti‐poverty agenda referred to by TKPKD and RPJMD in the respective district or city. TKPKD is in fact tasked to integrate and speed up tangible measures to curtail poverty at the provincial, district and city level. TKPKD is responsible for carrying out the following functions: (1) coordinate the formulation of anti‐poverty policies and align the implementation process at the local level (2) facilitate cross‐sectoral implementing agencies, build interactive communication and disseminate information on poverty reduction (3) monitor and evaluate the implementation of poverty reduction policies and programs (4) ensure the implementation of TKPKD functions at the district/city level and foster cooperation among districts/cities and promote partnerships for accelerating poverty reduction for TKPKD at the provincial level. As a cross‐sectoral forum expected to fulfill its mandate through a participatory manner, the forum should represent various elements within the local government, the private sector and the public. The public specifically should among others involve poor communities, religious leaders, non‐governmental organizations, research institutes and universities. This cross‐
sectoral forum in reality is dominated by local government agencies, while the public is typically represented by prominent community figures having close ties with the local government. Similarly, non‐governmental organizations and research institutes are normally established by the local government simply for the purpose of meeting requirements. This obstructs TKPKD from effectively performing its monitoring and evaluation function. It appears that TKPKD is established plainly for satisfying requirements in order to be allowed to run poverty reduction programs. Furthermore, TKPKD is not financially supported by the regional budget. This imposes an additional burden for the local government to allocate funds for TKPKD operation. These issues are among the reasons why provinces are reluctant to maximize TKPKD’s role and function. The question then is how do anti‐poverty programs that have been divided into 4 clusters fit into the strategy applied by TKPKD? An answer to this question is crucial to make sure that programs grouped into these clusters are not detached from programs conducted by SKPDs. The situation is made worse by a rural planning model that consists of two processes: PNPM program planning (known as PNPM musrenbang) and regular musrenbang. Although the government has launched an integrated PNPM program in an attempt to deal with the different forms of planning mechanisms, in actual implementation in nearly all regions planning 44
processes are poorly aligned without a coherent document and budget plan. Programs that materialize from these planning processes tend to lean towards infrastructure development. Under such circumstances, the implementation of ongoing poverty reduction programs will most certainly be less than optimal. This is attributed to lack of integration and synergy among poverty reduction programs. Program targeting, beneficiaries and management will therefore be inconsistent with the initial plan and expected goals. As a consequence, anti‐poverty programs will be ineffective in lowering poverty levels. 45
CHAPTER IV CONCLUSION AND RECOMMENDATION The poverty issue in Indonesia cannot simply be resolved through the introduction of policies. Anti‐poverty policies can instead deepen and aggravate the situation if they are not grounded in valid field data and facts. This is compounded by the lack of synergy and coordination among program implementing agencies and the half‐hearted commitment of the government in ensuring maximum results from ongoing programs. The following measures are therefore recommended: 1. Clearly define the planning mechanisms and processes for poverty reduction programs at the village to district level to guarantee that planning documents represent and accommodate poverty‐related issues. 2. More in‐depth analysis of TKPKD’s role and function as, primarily in monitoring and assessing the implementation of poverty reduction policies and programs. 3. Build the commitment of the central/national government in maximizing TKPKD’s role and function by setting aside the necessary budget for its operations and not put a strain on the regional budget. 4. A more extensive analysis is necessary on existing anti‐poverty programs of which the outcomes should help formulate programs that effectively address the needs of the respective region, and not simply become a partial agenda that focuses on labor intensity. 5. The government should be urged to validate data on the number of poor people to ensure that programs are accurately targeted for eligible beneficiaries. 46
References – Akhmadi, Asri Y, Budiyati. S, Yumna A (2010) Access to Justice; Empowering female heads of household in Indonesia. Case studies in Nangro Aceh Darussalam, West java, West Kalimantan, and East Nusa Tenggara, Smeru Research Institute – Asian Development Bank (2013). The Social Protection Index; assessing the Result for Asia and the Pacific – Hastuti, Usman. S, Sulaksono. B, Mawardi. S, Syukri.M (Sept 2013) Pemantauan Cepat Pelaksanaan Bantuan Langsung Sementara Masyarakat (BLSM) 2013. Lembaga Penelitian Smeru, Jakarta. – Hickey, S. (2008); Conceptualizing the politics of sosial protection in Africa – Kementerian PPN/Bappenas; Kerangka Dasar RPJMN 2015­2019 Perlindungan Sosial. – Tim Nasional Percepatan Penanggulangan Kemiskinan (TNP2K) Penanggulangan Kemiskinan situasi terkini, target pemerintah, dan program percepatan. 47
INEQUITABLE ACCESS TO BANK LOANS M. Firdaus Abstract The banking sector of a modern state assumes a crucial role. It sets the pace in which a country’s economy develops through capital allocations in terms of quality and quantity. In line with this, Indonesia’s banking institutions also envision to elevate the standard of living of the common people through a broad range of activities. Alas, the country’s banking sector has not been entirely focused on economic sectors, such as the MSMEs (micro, small and medium‐
scale enterprises), from which most of the people depend on for their livelihoods. To date, the proportion of credit disbursed by national banks to MSMEs remains below 21% from total bank loans, with the exception of BRI at 39.05%. A national bank has even imposed restrictions on MSMEs, specifically micro‐enterprises, by making it a requirement for them to apply for loans with a co‐applicant such as a cooperative. Credit interest rates for micro‐entrepreneurs are higher than for medium‐scale businesses. Neighboring countries such as China, Malaysia, South Korea and Thailand in contrast have been kinder to small businesses by setting aside over 50% of their loans. The banking sector typically serves large‐to‐medium‐scale businesses. Anything less, including the agricultural business, is considered unbankable sectors. Small wonder if the financial gains reaped by national banks consistently show an upward trend over time. In 2013, the average profit earned reached 14‐17 percent. In comparison, banking institutions in nearby countries bring in an average profit of only 1‐4 percent. Banks in Malaysia post a 3.03% profit, the Philippines at 3.92%, Vietnam at 3.34% and Singapore at 1.79%. The banking industry’s negligible attention to micro and small entrepreneurs and farmers raises doubts over its commitment to improve the people’s welfare as it should among others guarantee the financial inclusion of citizens. MSMEs in fact absorb 101.72 million workers (97.3%), and contribute 57.12% to the country’s Gross Domestic Product (GDP). These substantial figures are generated by a total of 55.2 million MSMEs or 99.98% of all business units in Indonesia. This sector acts as a buffer by absorbing labor when the formal sector is pushed further aside, and the agricultural industry can no longer sustain the economy, and manufacturing slows down. Hence, MSMEs and the agricultural business becomes a highly strategic vehicle for improving the people’s lives and alleviating the poverty situation. 48
Introduction Capital Policy of Banking Institutions The economy of a country is indirectly associated with the performance and dynamics of the banking sector. Banks are business entities that accumulate and safe keep public funds to be channeled for economic development through business undertakings and expansion. The pace at which an economy develops hinges on the quality and quantity of capital flows that among others may originate from banking institutions. Banks therefore function as an intermediary where members of the public may deposit their money in banks to be re‐invested to those in need of funds. This mechanism is set forth in Law No. 14/1967 on Principles of Banking later improved by Law No. 10/1998 that defines financial institutions as entities involved on the financial service sector by drawing funds from the public and re‐channeled to the public. Furthermore, Law No. 10/1998 on Amendments to Law No. 7/1992 describes a bank as “a legal entity that amasses funds from the public as savings and channels the money to the public through credit and or other forms in a view to improve the people’s standard of living”. Kasmir (2013)36 also emphasized on the banking sector’s indispensable role primarily as a financial intermediary that transfers funds from groups with surplus money to those in deficit, in addition to facilitating the delivery of other financial services. This illustrates the vital role that banking institutions play in national economic development. Should the banking sector fail to carry out its function accordingly, it will impede national economic development which in turn will undermine efforts to improve the people’s welfare and bring unemployment rates down. Various studies have similarly highlighted on the positive correlation between satisfactory growth in the banking sector and overall economic development. Sunarsip, head of the economics team for The Indonesia Economic Intelligence, in a paper on “Analysis of Deregulation, Crisis, and Banking Restructurization in Indonesia”, asserted on the crucial role of banking institutions. He quoted Diamond (1984) who contended that financial intermediaries can help lower the cost of monitoring the utilization of funds from creditors. This implies that the intermediation of financial institutions will contribute in elevating the well‐being of the people. He further maintained that this illustrates on how the financial sector is essential for the economic development of a nation.37 Alas, the strategic and noble role of the banking sector as an intermediary that envisions improving the lives of the people is still being questioned. The banking sector expected to function as a key pillar in the financing of national economic development in fact still needs to improve its performance to be able to more optimally keep the nation’s economic engine running. Erani Yustika (2013), INDEF Director, stated that the banking business thus far has focused more on the non‐tradable sector than the real/agricultural sector (tradable). A considerable proportion of the population in fact depends 36
Dr. Kasmir, “Bank dan Lembaga Keuangan Lainnya”, Jakarta: PT Raja Grafindo Persada, 2013, 12th print. With co‐author Suyono Salamun, Phd, Sunarsip, the article was featured in “Jurnal Keuangan Publik”, Vol. I/No.1, September 2003, published by the Finance Education and Training Agency, Indonesian Ministry of Finance. 37
49
on the real and tradable sector for their livelihoods. As this particular sector has not been given its due attention, instead of being able to make a difference it has contributed to worsening the poverty and unemployment situation. Consequently, improvements to the well‐being of the people at all layers have been sluggish.38 The table below shows the lackluster growth in the tradable sector due to minimum financial support, including from the banking sector. Economic Growth by Sector (Erani, 2013) Sector 2006 Tradable Agriculture 3.36 Mining 1.70 IP 4.59 Nontradable LGA 5.76 Construction 8.34 Trade, hotel & resto 6.42 Transportation and 14.23 commodity Finance, RE and JP 5.47 Services 6.16 GDP 5.50 Source: compiled from BPS, 2011 2007 2008 2009 2010 2011 2012 3.47
4.83
3.98
2.86
3.00 3.97 1.93
0.71
4.44
3.48
1.40 1.49 4.67
3.66
2.16
4.48
6.2 5.73 10.33 10.93 14.29 5.31
4.8 6.40 8.53
7.55
7.07
6.98
6.7 7.50 8.93
6.87
1.30
8.69
9.2 8.11 14.04 16.57 15.50 13.45 10.7 9.98 7.99
6.44
6.35
8.24
6.24
6.01
5.05
6.42
4.58
5.65
6.01
6.10
6.8 6.7 6.5 7.15 5.24 6.23 This paper therefore questions why growth in sectors involving the majority of the population in economic activities, such as micro, small and medium‐scale enterprises and farmers as well as other real sectors has been worryingly slow? Is this because of the lack of capital support from financial institutions? If the answer is “yes”, what and how has been the role and performance of the banking sector thus far in supporting efforts to improve the people’s welfare? The foregoing questions have been the point of departure for the author to look into problems related to financial institutions, including banks, as entities that seek to “make the people’s lives better” but appear to simply be more inclined in reaping profits. Analysis of Bank Loans for Improving People’s Welfare The banking industry in the past several years has been under public scrutiny, mainly relating to the utilization of funds accumulated from the public through various schemes. A portion of funds held by banking institutions (domestic or foreign) has in fact not been channeled in the form of credit. These funds are instead parked or transferred into SBI (central bank’s certificates of deposit) and SUN (government bonds). This banking practice is corroborated by a Bank Indonesia (central bank) report in which it has been disclosed that by May 2010 bank funds held in the form of SBI amounted to IDR 253.6 trillion, while funds deposited with FASBI 38
Koalisi Masyarakat Sipil Untuk APBN Kesejahteraan, “APBN Konstitusi 2014”, Jakarta: Fitra, 2013. p. 9. 50
or the deposit facility reached IDR 47 trillion, and funds invested in securities in addition to other receivables were worth IDR 333.3 trillion.39 With regard to credit, the national banking sector has set high interest rates, even though Bank Indonesia has attempted to lower its interest rate (BI rate). With a monetary policy model based on inflation, currently kept at a relatively low rate, Bank Indonesia should make sure that national banking institutions follow suit and bring down their loan interest rates.40 This situation is illustrated in the following table. Trend in BI Rate and Loan Interest Rate, 2007‐2012 (Prakarsa, 2013, compiled from Bank Indonesia report) Category and Type of Interest Rate BI rate State­owned banks Working capital Investment Consumption Local state banks Working capital Investment Consumption National private banks Working capital Investment Consumption Foreign banks and mixed Working capital Investment Consumption Commercial banks Working capital Investment Consumption 2007 8.00 13.47
12.93
14.03
15.33
14.61
13.82
12.96
13.11
14.69
10.23
10.56
36.24
13.00
13.01
16.13
2008 9.25
Year
2009 2010 6.50
6.50
2011 6.00
14.61
13.85
13.84
13.83
12.56
13.88
13.06
10.81
13.05
12.37
10.39
12.91
14.43
13.52
14.06
13.91
12.54
14.17
13.57
12.44
14.10
13.52
12.40
13.91
15.90
14.85
15.91
14.09
13.51
16.22
13.02
13.20
14.05
12.34
12.64
13.11
14.58
15.00
35.32
11.73
12.22
35.59
10.23
11.82
31.66
8.71
14.89
30.73
15.22
14.40
16.40
13.69
12.96
16.42
12.83
12.28
14.53
12.16
12.04
14.15
2012 5.75 12.00 9.98 12.72 13.63 12.33 13.99 12.02 12.23 13.17 7.98 9.54 30.66 11.79 11.46 13.90 39
Dr. Ahmad Erani Yustika, “Kebijakan Reformasi dan Kerapuhan Kelembagaan Ekonomi: Ikhtiar
Meluruskan Arah Perekonomian Nasional”, Malang: Brawijaya University, 30 December 2010. Inaugural
Address for Professorship in Institutional Economics at the Faculty of Economics, Brawijaya University.
40
Setyo Budiantoro & Wiko Saputra, “Rezim Suku Bunga Tinggi dan Kebijakan Moneter pro Kemiskinan”, Jakarta: Prakarsa, Policy Brief, 2013. 51
However, compared to the interest rates of neighboring countries, BI rate in fact is considered high. In 2009 for example, Indonesia’s credit interest rate was 14.5%, whereas Malaysia was much lower at 5.08%, Thailand at 5.96%, South Korea at 5.00%, and China at 5.31%.41. This lofty interest rate has compelled Indonesia entrepreneurs and other debtors of banking institutions to reassess their business performance and make the necessary adjustments such as enhancing efficiencies, cutting down production, lowering the quality of raw material and reducing the number of employees. In terms of profit, national banks’ net interest margin42 in 2009 reached the level of 5 ‐ 6%. In 2013, although the national economy is beset by a host of misfortunes such as an inflation rate at 8.22 percent and rupiah exchange rate at IDR 12,000 per USD, national banks in general have managed to register profits at 14 ‐17 percent. BRI (Bank Rakyat Indonesia) for example posted IDR 21.6 trillion in profits, Bank Mandiri at IDR 18.2 trillion, Bank Danamon at IDR 4 trillion, and BTN at IDR 1.56 trillion.43 In comparison, the average profit for banks in neighboring countries ranges between 1% and 4%. According to statistics, the banking sector in Malaysia only managed to bring in 3.03% in profits, the Philippines at 3.92%, Vietnam at 3.43%, and Singapore at 1.79%. As a consequence, the loan‐to‐deposit ratio (LDR)44 of banking institutions reached a low level, yet at the same time gain immense profit. This means that despite setbacks in other economic sectors struggling to sustain a satisfactory performance, the banking industry instead has enjoyed prodigious profits.45 The net interest margin (NIM) of national banks reached 5.5% compared to less than 2% among other ASEAN countries. This higher net interest margin has pushed the interest rates for bank loans further upwards as described earlier which has in turn hampered the growth of the business sector. This is compounded by the less than optimal efficiency of national banks as indicated by high CIR or cost‐to‐income ratio46 as shown in 2012 at the level of 74.1%. According to some experts, the reason for banking institutions high NIM is none other than the need to cover the cost of inefficiencies.47 41
Dr. Ahmad Erani Yustika, “Menata Kembali Sektor Perbankan”, 11 April 2013, downloaded from http://ahmaderani.com/menata-kembali-sektor-perbankan.html. 42
NIM (net interest margin) represents the difference between interest earned and interest paid out to lenders
calculated on a tax-equivalent basis. Source: http://www.bi.go.id/id/Kamus.aspx?id=L. 43
A Tony Prasetiantono, “Bencana Alam dan Perbankan”, Kompas, 17 Feb, 2014. 44
LDR represents the ratio between total loans channeled by banks and total deposits from various sources.
LDR can also be defined as the financial ratio of banking institutions associated with their liquidity. See Dr.
Kasmir, ibid,.
45
Dr. Ahmad Erani Yustika, “Menata Kembali Sektor Perbankan”, 11 April 2013, ibid,.
46
CIR refers to the banks’ efficiency ratio that measures operating expense against operating income. The
higher the expense-to-income ratio, the less efficient the banking operation. Source: BI glossary
(http://www.bi.go.id/id/Kamus.aspx.id=L).
47
Koalisi Masyarakat Sipil Untuk APBN Kesejahteraan, “APBN Konstitusi 2014”, Jakarta: Fitra, 2013, ibid. 52
Trend in NIM, CIR
R and CAR off Commerciial Banks (E
Erani, 2013) 90
80
70
60
50
40
30
20
10
0
BOPO
CAR
NIM
2008
2009
2010
2011
2012
titutions haave also giv
Banking ins
B
ven miserly support tow
wards the rreal sector, p
primarily m
micro, small and m
s
medium‐scalle enterprises (MSMEs)), as well as the agriculttural industtry. At least 48% of o the coun
ntry’s poorr population in fact relies r
on th
he agriculttural sectorr as their main livelihoods. Banking institutions on the otther hand appear to be purely profit‐orieented, refusing r
to be involved in less lu
ucrative secctors such as agricultu
ure. This iss evident in
n the titutions’ negligible credit allocattion for certtain sectorss as shown in the follo
banking ins
b
owing table. t
Loan Porttfolio of Ban
nking Institu
utions 2013
3 (Enny Sri H
Hartati, 201
13) Peertanian
Peengangkutan &
& ko
omunikasi
Jaasa‐jasa
Peertambangan
In
ndustri pengollahan
Banking B
insstitutions in
n general do d not consider MSMEs (may allso include agriculturee) as bankable bu
b
usinesses, seeeing them as a high‐riisk sector w
which will in
ncrease ban
nks’ vulnerability towards non
t
n‐performin
ng loans. Credit given o
out to MSME
Es by privatte and public national b
banks remains bel
r
low 21% from total baank loans, eexcept for B
BRI at 39.05
5%. Nationaal banks such as 53
BNI B have ev
ven imposeed restrictio
ons on MSM
MEs – speciffically micrro businessees – makingg it a requiremen
r
t for them to apply fo
or loans witth a co‐app
plicant such
h as a cooperative. Intterest rates r
for micro‐entrep
m
preneurs arre consideraably high compared c
to medium‐size busineesses. This T
clearly
y shows ho
ow credit channeled c
to MSMEs from bank
king institu
utions has been unfavorable
u
e toward sm
mall businessses as decissions are maade purely ffor businesss reasons.48 Percentagge of Credit to MSEs (m
micro and sm
mall enterprrises) Again
nst Total Creedit Disburssed No 1. 2. 3. 4. 5. 6. 7. Name o
of Bank
Ban
nk Mandiri Pan
nin Bank UO
OB OC
CBC NISP CIM
MB Niaga Ban
nk Danamon
BR
RI Percentage of M
MSE Credit 5.47%
%
9.13%
%
1.70%
%
2.13%
%
10.82%
17.12%
39.05%
Sou
urce: Consollidated finan
ncial statem
ments of bank
ks, September 2011 (com
mpiled) Furthermor
F
re, the cred
dit report fo
or the prevvious year (2012) revvealed a so
omewhat sim
milar trend. Based
t
d on data co
ompiled by Bank Indon
nesia and F
Financial Insstitutions C
Capital Mark
ket in 2012, the am
2
mount of fin
nancing allo
ocated to MSSMEs was only 20.1% ffrom total b
bank loans. F
From total loans d
t
disbursed to
o MSMEs in
n Indonesia, only 20.7%
% were inteended for m
micro busineesses amounting t
a
to only IDR 612 trillion
n49. In 2013, credit set aaside for MSMEs was less than 20
0% or roughly IDR
r
R 600 trillion
n from totall bank loanss to the tunee of IDR 3,30
00 trillion. Percentaage of loans to MSMEs aand non‐MSSMEs (Praka
arsa, 2013, ccompiled fro
om BI reporrt) 120.00%
100.00%
80.00%
60.00%
40.00%
20.00%
0.00%
Non U
UMKM
UMKM
M
2011
2012
This T
is subsstantiated by b a Bank Indonesia (B
BI) survey at the end of 2012 which showss that high‐income
h
e individualls mostly prrefer to borrrow from baanks than th
hose earnin
ng low incom
me. If this t
is the case, how do low‐inco
ome earnerrs acquire capital? It was found that they have Herjuno Nddaru Kinasih and
a Rachmi Hertanti,
H
”Berrburu Pundi di
d Negeri Selaatan: Kajian Kritis
K
terhadaap
Peran
P
Bank Asing
A
dan Bannk Nasional di
d Indonesia dalam
d
Penyaluuran Kredit kke Usaha Mikkro dan Kecil””,
Jakarta:
J
IGJ, 2011.
2
48
4
49
Kompas, Friday, 25 Octo
ober 2013. 54
secured capital loans from “non‐financial institutions”, i.e., individual owners of capital who can provide the money upon request. Credit facilities from banks on the other hand are mainly accessed by upper‐middle‐income earners. This is an undeniable indication of the dismal state of formal financial services accessible to all layers of society.50 A similar situation was also detected by ASPPUK (Association for Support of Women in Small Businesses) from a survey conducted towards women micro‐entrepreneurs in 20 provinces which showed that 80.52% of these women – who represent small‐micro businesses – have never borrowed capital from banks, leaving only 10% of entrepreneurs accessing bank loan facilities. Reasons for their reluctance in dealing with banks include the following: 30.80% of small‐micro entrepreneurs mentioned the complicated loan application process, 11.65% admitted to not having collateral, and 21.19% have never come into contact with banks.51 The manner in which banking institutions treat MSMEs – primarily micro businesses – has remain unchanged since 2001. In the same year, the author highlighted on several reasons cited by micro‐entrepreneurs (specifically women small‐micro entrepreneurs) on their difficulty in accessing capital loans from banks. First, micro‐entrepreneurs live far from where banking institutions are located. Second, their small‐scale businesses only require a small amount of additional funds whereas banks do not provide small amount credit for efficiency purposes. Third, micro‐entrepreneurs have yet to manage their finances according to the bank’s bookkeeping standards. Fourth, limitations in asset ownership that can formally qualify as collateral.52 The following provides an example of a female micro‐entrepreneur and her attempts at obtaining capital for the continuity of her business. After repeated attempts at finding for business loans, Sri Rejeki who hails from Solo, finally managed to borrow from an entity (cooperative) located not far from where she lives, and in which she is a member of. 50
Ryan Kiryanto, “Strategi Implementasi Program Inklusi Keuangan di Indonesia”, www.infobanknews.com
(27 August 2012 15:42 local time).
51
Survey database on small-scale women entrepreneurs, Asosiasi Pendamping Perempuan Usaha Kecil
(ASPPUK), 2008 (unpublished).
52
M. Firdaus, et.al., “Aspek Pemberdayaan Perempuan di Balik Lembaga Keuangan Mikro”, written for Jurnal Analisis Sosial, Vol.6 No.3, December 2001, pp.41‐51. 55
Sri Rejeki Sets Up an Overlocking Sewing Business Sri Rejeki runs an overlocking sewing business in the village of Purwodiningratan, Solo. In July 2007, Sri Rejeki came to know of an opportunity to join a cooperative named LKP (Women’s Financial Institution) JARPUK Solo. She has long yearned to open her own sewing business but lack of start‐up capital has prevented her from doing so. One month after joining LKP, she discussed with the LKP management on the possibility of borrowing IDR 1 million to help her buy a new overlock machine in her bid to start up her own business. She was advised to fill in the LKP loan application form. Once her application was approved, it took a month for the institution to disburse the loan as it had it wait for installments from other members in order to accumulate the required amount. While waiting for the funds to be disbursed, Sri Rejeki enrolled in a sewing course. She paid IDR 500,000 to be registered at a sewing school located within reaching distance from her village. Although the course was for three months, Sri Rejeki only needed a month to master the skills. This is a real‐life example of how the uniqueness and potential of micro‐businesses is overlooked by the banking sector. A multimodel approach is necessary to identify the business potential of micro‐entrepreneurs in a view to help them lead better lives. Under such circumstances, it is not surprising if data from Infobank’s research bureau showed that nearly all micro‐entrepreneurs from the lower economic rung known as the productive poor totaling 38 million people remain unserved by formal financial service providers. A classic reason often cited by banking institutions is that this underserved portion of the population are far from bankable and likely to have difficulty in paying off loans. Loans for Entrepreneurs53 Business scale Small, medium and large Micro Productive Poor Amount
615.60 thousand
Credit ceiling
IDR 50 million above
Percentage served
99% 16 million
37.38 million
IDR 3‐50 million
< IDR 3 million
40% <10% 53
Kartono Muhammad, “Ada Zona Biru, Siapa Berani Masuk?”, Jakarta: Infobank, No. 403, October 2012,
p.33. 56
This T
indicattes that desspite being a member state of G2
20, access to finance fo
or the peop
ple of Indonesia reemains at th
he level of 2
20% or in otther words the remainiing 80% hav
ve not been
n able to access fo
t
rmal financcial institutiions. Even aat the ASEA
AN level, Ind
donesia occu
upies the lo
owest position in t
p
terms of tw
wo aspects. F
First, outstaanding third
d party funds as a perccentage of ggross domestic d
prroduct (GDP
P) is 36.41%
%. Second, the credit‐tto‐GDP ratio is only 27.49%. A World W
Bank study B
in 2012 also
o came acro
oss a similarr set of dataa. From a group of samp
ple respond
dents, it was foun
nd that only
y 20% of In
ndonesia’s population hold bank
k accounts (or ( from fo
ormal financial ins
f
stitutions) frrom which only 8% usee their acco
ounts solely for salary trransfers.54
Credit‐to‐GD
DP Ratio (%) (Erani, 20
013) Trend in C
160
140
chinaa
120
Indiaa
100
Indo
onesia
80
Koreea selatan
60
Malaasyia
40
Philipina
20
Thailand
0
2009
20
010
2011
The banking
T
g sector’s laack of attenttion to the rreal sector ffrom which SMSEs and farmers depend their livelih
t
ood on castts doubt oveer its comm
mitment to iimprove thee well‐beingg of people from all walks of a
f life, including with reegard to thee financial in
nclusion go
oal. MSMEs in fact has been able to abso
a
orb 101.72 million worrkers (97.3%), and con
ntributed 57.12% to G
GDP. This in
ndeed makes m
sensse as data from the Ministry M
of f Cooperativ
ves and MSSMEs (2013) showed that Indonesia haas 55.2 milllion MSMEs (99.98%) ffrom total b
business uniits. These faacts illustratte the strategic rol
s
le that MSM
MEs play in iimproving tthe lives of the people and alleviaating the pov
verty situation. s
The T agriculttural sectorr paints an almost sim
milar picturee. Minimum
m support frrom the ban
nking sector s
is on
ne of the faactors contributing to the sluggish growth in Indonessia’s agriculltural industry. Frrom 2005 to 2012, thee importatio
on of rice, maize, m
potaato and cabbage has in
n fact soared tenfo
s
old or almo
ost a 100% surge each year. This is also the case for im
mported ricee that saw a 150%
s
% jump annu
ually. The im
mport of prrocessed cassava grew
w eightfold aand for the same period, p
imported banan
nas rose fiv
vefold. The situation w
was even wo
orse for fresh chilies aas the importation
n of the commodity rock
keted seven
nfold in the past four yeears.55 54
Ryan Kiryantto, op.cit. p.3. Setyo Budion
ntoro, “Pertum
mbuhan Tanpa Pembangunan
n”, Kompas, Wednesday, 12 FFebruary 2014
4, p. 5. 55
57
Conclusion and Recommendations From the foregoing explanation it appears that not much can be expected from the banking sector as one of the elements that can help ensure the betterment of people from all layers of society. Policy breakthroughs are therefore crucial through the following measures: First, the need to build government’s political and economic support towards MSMEs through favorable monetary policies that include low interest rates. As shown in the past four years, consistently high bank interest rates will impose a heavier burden on the real sector. Indonesia needs to learn from developed countries that have been paying heed to MSMEs by introducing eco‐friendly lending policies. Second, with regard to capital loans for MSMEs, apart from making the most of banking institutions in addressing poverty issues, micro finance can also be an appealing option. According to Agus Martowardoyo, Governor of Bank Indonesia, at least 600,000 micro‐credit institutions in Indonesia are now being assessed by the Financial Services Authority (OJK) responsible for overseeing and issuing permits for all types of financial service providers.56 This is purely a people’s initiative that merits appreciation in their effort to meet their financing needs for improving their lives. It is now time to create synergies between microcredit institutions and formal banking institutions and undertake coherent measures to optimize the role and function of financial institutions in enhancing the welfare of the nation. In the short term, efforts should be made to enhance the interconnectedness between banks and microcredit institutions to more effectively apply a results‐oriented approach for improving the people’s well‐being. In the long run, financial inclusion should work towards bringing banking institutions closer to the people and function as a source of financing for business development through various schemes.57 By drawing from local practices applied across Indonesia in accessing capital funds for optimizing the function of banking institutions in creating a prosperous society, the issue on the scarcity of financing and its utilization can therefore be surmounted. Third, the author has long held the opinion that given the current banking sector performance that appears to be purely profit‐seeking, it is hard to expect banking institutions to significantly make a difference to the lives of many. However, if banks are willing to move away from its profit motive, as mentioned by M. Dawam Rahardjo, an expert on the Pancasila economic system, and focus on maximizing the benefits that their customers can enjoy, the situation may be reversed. This means that banks will evolve into financial institutions oriented toward ensuring sustainable positive social and environmental impact or focused on improving the people’s quality of life, and become ethically‐oriented banks. Rahardjo stated that these values are expected to bring about social and environmental benefits. At the global level, these ethical banks are already in operations and known as social 56
Dewi Meisari Haryanti, “What does financial inclusion really mean?”, The Jakarta Post, February 12,
2014.
57
Andreas Maryoto, “Perbankan Nirkantor, Sebuah babak Baru”, Kompas, 25 October 2013. 58
banks. Like‐minded banks have banded together under an organization called “The Global Bank Based on Ethical Value” (GBEV). Alas, banks like these are sorely absent in Indonesia, and neither are they recognized in Indonesia’s banking laws, including Law No.10/1998.58 At this particular juncture, the author finds it urgent to deal with injustices or inequalities in accessing capital funds from banking institutions in an effort to improve the people’s welfare, in addition to the advancement of financial inclusion, while BI (Bank Indonesia) and the banking community are expected to make breakthroughs in initiating and promoting the emergence of social banks. Fourth, banks must therefore be encouraged to pay attention to natural resource‐based development such as agriculture, marine and forestry, supported by competent human capital. Industrialization based on the agricultural, marine and forestry sectors under a pro‐people economic regime – such as cooperatives – represents a viable model that needs to be taken into account by the banking sector. The world is now taking notice of food production drawn from the marine, forestry and agricultural sectors to ensure global food security. Hence, there is no reason for example to resist the initiative to establish agricultural banks. Numerous recommended measures to improve banking sector performance in Indonesia are expected to put an end to inequalities across the banking sector in a view to generate long‐
lasting impact and benefits for the betterment of the nation. 58
M. Dawam Rahardjo, “Inklusi Finansial”, Kompas, Monday, 6 January 2014. 59
References 1. A Tony Prasetiantono, “Bencana Alam dan Perbankan”, Kompas, 17 Feb., 2014. 2. Andreas Maryoto, “Perbankan Nirkantor, Sebuah Babak Baru”, Kompas, 25 October 2013. 3. Catatan Monitoring ASPPUK, tahun 2007. Some monitoring records have been published in Deddy Heriyanto and M. Firdaus, “Lembaga Keuangan Perempuan (Konsep, Praktek dan Dampak)”, Jakarta: ASPPUK & NZAID, December 2007. 4. Database survei perempuan usaha kecil, Asosiasi Pendamping Perempuan Usaha Kecil (ASPPUK), 2008 (unpublished). 5. Dewi Meisari Haryanti, “What does financial inclusion really mean?”, The Jakarta Post, February 12, 2014. 6. Dr. Ahmad Erani Yustika, “Kebijakan Reformasi dan Kerapuha nKelembagaan Ekonomi: Ikhtiar Meluruskan Arah Perekonomian Nasional”, Malang: Brawijaya University, 30 December 2010. Inaugural speech for professorship in institutional economics at the Faculty of Economics, Brawijaya University. 7. Dr. Ahmad Erani Yustika, “Menata Kembali Sektor Perbankan”, 11 April 2013, downloaded from http://ahmaderani.com/menata­kembali­sektor­perbankan.html. 8. Dr. Kasmir, “Bank dan Lembaga Keuangan Lainnya”, Jakarta: PT Raja Grafindo Persada, 2013, 12th print. 9. Herjuno Ndaru Kinasih and Rachmi Hertanti, ”Berburu Pundi di Negeri Selatan: Kajian Kritis terhadap Peran Bank Asing dan Bank Nasional di Indonesia dalam Penyaluran Kredit ke Usaha Mikro dan Kecil”, Jakarta: IGJ, 2011. 10. Kartono Muhammad, “Ada Zona Biru, Siapa Berani Masuk?”, Jakarta: Infobank, No.403, October 2012, p.33. 11. Koalisi Masyarakat Sipil Untuk APBN Kesejahteraan, “APBN Konstitusi 2014”, Jakarta: Fitra, 2013, p. 9. 12. Koran Kompas, Friday, 25 October 2013. 13. M. Dawam Rahardjo, “Inklusi Finansial”, Kompas, Monday, 6 January 2014. 14. M. Firdaus, et. al., “Aspek Pemberdayaan Perempuan di Balik Lembaga Keuangan Mikro”, written for Jurnal Analisis Sosial, Vol.6 No.3, December 2001, pp.41‐51. 15. Ryan Kiryanto, “Strategi Implementasi Program Inklusi Keuangan di Indonesia”, www.infobanknews.com (27 August 2012 15:42 local time). 16. Setyo Budiantoro & Wiko Saputra, “Rezim Suku Bunga Tinggi dan Kebijakan Moneter pro Kemiskinan”, Jakarta: Prakarsa, Policy Brief, 2013. 17. Setyo Budiontoro, “Pertumbuhan Tanpa Pembangunan”, Kompas, Wednesday 12 February 2014, pp. 5. 18. Sunarsip and Suyono Salamun, Phd, “Analisis Atas Deregulasi, Krisis, Restrukturisasi Perbankan di Indonesia”, Jakarta: Badan Pendidikan dan Pelatihan Keuangan, Departement Keuangan RI, “Jurnal Keuangan Publik”, Vol. I/N0.1, September 2003. 60
Policy Paper PROMOTING OIL PALM POLICIES THAT SUPPORT SMALLHOLDERS FOR SUSTAINABLE ENVIRONMENT Irhash Ahmady59 Abstract Based on plans drawn up by the Directorate General of Plantations under the Ministry of Forestry in 2010 through its Oil Palm Plantation Road Map until 2014, palm oil is considered a strategic commodity which Indonesia can rely on for long term. The continual expansion of oil palm plantations from year to year, specifically in the past decade, reflects today’s reality. A slew of issues have emerged, from the conversion of forests and peatlands into oil palm estates, worsening environmental degradation, imperiled local biodiversity to the loss of innocent lives due to oil palm‐related conflicts. Numerous aspects behind Indonesia’s success in expanding its oil palm plantations have instead become burdensome. The crude palm oil (CPO) business previously almost came to a standstill, despite having the Roundtable on Sustainable Palm Oil (RSPO) or Indonesian Sustainable Palm Oil (ISPO) mechanisms in place for the purpose of minimizing conflict and environmental impact. These solutions however failed to effectively deal with the root cause of issues confronting oil palm farmers or other crop growers whose land has been seized, while the environmental crisis takes a turn for the worse. The Oil Palm Development Road Map paves the way for scaling up the expansion of the oil palm sector. Palm oil has turned into a prime commodity vied after by countries worldwide either for food or energy consumption. Instead of bringing prosperity to the local communities, oil palm plantations have substantially widen inequalities in all facets of life, even making it further impossible to guarantee the people a sense of security and safety, and the inability to bolster productivity and improve their well‐being. The rapid pace of development has also significantly weakened the environmental capacity to heal itself. If oil palm development has failed to make a difference to independent farmers and the people as a whole in the past decade, and neither has it contributed to the overall progress of Indonesia as it is originally intended for, whose lives then do oil palm policies essentially wish to improve on, for whom is the development process for and what direction is Indonesia’s oil palm development road map going to? 59
Manager of Knowledge Management and National Executive Network for Walhi 61
Chapter I Introduction The palm oil business has lately undergone significant development. This is attributed to the upward trend in the global demand for palm oil which creates immense business prospects in the industry. In 2009, Indonesia became the world’s largest palm oil producer with a production capacity of 20.6 million tons of palm oil, followed by Malaysia with a production volume of 17.57 million tons. In 2012 alone, Indonesia’s CPO production reached 26.5 million tons60. The bulk of Indonesia’s palm oil production is exported, accounting for 80% of total production by 2008. India is the main export destination, taking in 33% of Indonesia’s total palm oil export, following by China for 13% and the Netherlands for 9% (Oil World, 2010). Given such significant development, the Directorate General of Plantations deemed it necessary to formulate an Oil Palm Development Road Map for 2010‐2014 which sets out the macro development goals for the plantation sector and agroindustry that include: increasing GDP from 2.97% to 3.19% (constant 2000 prices), employment opportunities (from 19.78 million to 21.42 million people), investment (from IDR 45.18 trillion to IDR 68.49 trillion), agricultural trade surplus (from US$ 28.86 to US$ 59 billion), plantation farmer’s income (from US$ 1600 to US$ 1840/household/2 ha), plantation crop exports (from US$ 31.89 to US$ 61.25 billion), and Farmers Terms of Trade or FTT (from 105.2 to 109.28). Mounting demand coupled with substantial income potential has prompted the expansion of oil palm estates across Indonesia. Based on the road map prepared by the Directorate General of Plantations, from 2010 to 2020 oil palm plantations are expected to grow 22 million hectares throughout Indonesia with the possibility of expanding and developing further. The successful development of Indonesia’s oil palm industry is inextricably linked to government intervention in facilitating investors to expand their business in Indonesia. Oil palm plantations are now being developed in more than 20 provinces, most concentrated in Sumatra, Kalimantan, Sulawesi and Papua, and even lesser islands such as Bangka Belitung. Based on data released by Walhi (Indonesian Forum for the Environment) in 201361, over 39 large corporations have been granted land use concessions (HGU) to operate on this small island known as Bangka Belitung. The island is practically besieged by large‐scale investments with 5 companies operating in West Bangka, 6 companies in Central Bangka, 4 companies in South Bangka, 10 companies in Bangka Induk, 6 companies in Belitung and 8 companies in East Belitung. Extending across a total area of 240,000 ha, more than 50% of Bangka‐Belitung is under the control of major corporations. The largest concession for the development of oil palm plantations in Bangka‐Belitung has been awarded to Sinar Mas, oil palm giant in Indonesia, and Cargill, a transnational company (TNC). In Central Kalimantan, from a total investment area of 13,090,772 ha or 85% of total area, HGU oil palm concessions for 4,254,804.773 ha are given out to over 340 large corporations. Among the largest is Wilmar Group, a Malaysian company with HGU concession rights in Central Kalimantan for 200,000 ha. 6060
Data from the Directorate General of Plantations, Ministry of Agricultural, 2013 Walhi’s research on Bangka Belitung, 2013, Menghentikan Tambang Tumbuh Sawit 61
62
In Nanggroe Aceh Darussalam, according to data from KUALA (Coalition for Acehnese Maritime), in the district of Aceh Tamiang from roughly 20,000 hectares of mangrove forests, including those within protection forests, 85% (or 17,000 ha) have been planted with oil palm trees of which 5,700 ha are within protection forests. Meanwhile in West Kalimantan, in the Pinang Luar and Sungai Arus Deras protection peat swamp forests in the district of Kubu Raya, some 4,034 hectares have been converted into industrial oil palm plantations. This forest conversion process in fact has not secured the necessary permit from the Minister of Forestry (Kompas, 2/07/2010). Much attention has been given to policies regulating the national oil palm industry. Apart from mounting global market demand, this is also due to the rapid dwindling of fossil fuel energy sources, such as coal and oil. Given the fact that global climate has become increasingly unpredictable as a result of unbridled consumption of unclean energy, palm oil as a renewable source of biofuel has given fresh hope for sustainable energy. The oil palm industry in Indonesia has become a lucrative business at the macro scale, and its massive expansion has created a whole set of problems that demands solutions. The existing regulatory framework provides immense opportunities for opening up large‐scale plantations. As a consequence, land disputes are among the many issues that have emerged, often escalating into agrarian conflict pitting the people against corporations. Productive land and farms available to the local people for the cultivation of oil palm or other food crops have increasingly shrunk in size. Not to mention environmental destruction as a result of unrestrained expansion and land conversion in favor of massive estates. This policy paper shall focus on government policies that broaden the ownership gap for productive agricultural land and that contribute to the devastation of the environment and biodiversity. Oil palm policies appear to grant corporations with numerous privileges and facilities, whereas farmers as legitimate land owners are instead systematically pushed aside. This policy paper is expected to provide the basis for initiating fundamental changes to the government’s road map on oil palm development in order to offer fairer solutions to ever widening inequalities and worsening environmental issues. 63
Chapter II Policy Review on Oil Palm Development in Indonesia A. Overview With regard to the plantation development strategy for 2010‐2014, the Directorate General of Plantations has decided to focus more on 15 national prime commodities: rubber, oil palm, cocoa, coconut, jatropha, tea, coffee, cashew nut, pepper, clove, cotton, tobacco, sugarcane, patchouli and Reutealis trisperma. With an annual average growth projected at 2.04%, total area set aside for national prime commodities will expand from 20,394 million hectares in 2010 to 22,144 million hectares by 2014, with the exception of tobacco which is predicted to develop at a constant rate of 205 thousand hectares in the next five years62. In the same strategy document, the expansion of oil palm plantations has also been included as part of the development agenda for 2010‐2014, known as the Road Map for Oil Palm Development and Palm Oil Management in Indonesia. This serves as the primary basis for reviewing Indonesia’s oil palm development policies and strategies until 2014. In this official government document, the main purpose of plantation development is to boost production and productivity, improve quality, added value and competitiveness in a view to increase the income and well‐being of the people. It is also aimed at increasing national revenue, both from plantations and sub‐sector plantations, supplying raw material for food and non‐food consumption (e.g., biodiesel) and managing resources in a prudent and sustainable manner. All these constitute as part of the national agenda which in its official document clearly covers numerous development aspects. On a macro‐economic scale, the oil palm industry promises bright prospects particularly as it serves as the basis for the national agroindustry. Plantation expansion has therefore become part of the road map on oil palm development, including therein revitalization efforts to boost agricultural productivity. Alas, the inclination has been more towards pushing for massive land conversion. The table below shows the expansion of the oil palm industry in Indonesia. Year 2006 2007 2008 2009 Existing 6,495,187
7,417,379
7,825,253
9,091,227
Size (Ha) Planned expansion 19,840,000
22,123,600
24,427,200
26,710,800
Source: Compiled data, Directorate General of Plantations, Sawit Watch 62
Rencana Strategis Direktorat Jenderal Perkebunan 2010 – 2014 [Strategic Plan of Directorate General for Plantations 2010 – 2014], Directorate General of Plantations, Ministry of Agriculture, Jakarta 2011, pp. 45 ‐ 46 64
At the macro level, from 2010 to 2014 plantations and the agribusiness are developed through the following measures: increase GDP from 2.97% to 3.19% (constant 2000 prices), employment opportunities (from 19.78 million to 21.42 million people), investment (from IDR 45.18 trillion to IDR 68.49 trillion), agricultural trade surplus (from US$ 28.86 to US$ 59 billion), plantation grower’s income (from US$ 1600 to US$ 1840/household/2 ha), plantation commodity exports (from US$ 31.89 to US$ 61.25 billion), and farmers’ terms of trade or FTT (from 105.2 to 109.28). At the micro level, oil palm development targets cover the following: increase hectarage from 8,127 thousand ha to 8,987 thousand ha, CPO production from 23,200 thousand tons to 28,439 thousand tons, and plantation productivity from 3.9 tons of CPO/ha to 4.3 tons of CPO/ha. In 2010‐2014, oil palm development is expected to meet the target of establishing a manufacturing cluster for palm oil and palm oil derivatives in the provinces of North Sumatra and Riau. This target can only be reached in a favorable business and investment climate. To meet the foregoing plantation development goals and targets, at farm level the development vision is to focus on boosting production, productivity and quality of plantation crops in a sustainable manner in order to improve the welfare of the plantation community. Meanwhile, the mission is to facilitate efforts to improve production, productivity and quality of plantation crops; make available high quality seeds and production equipment; protect crops and deal with business interruptions; develop the plantation business and foster partnerships among plantation growers in a sustainable manner; develop and empower farmers’ institutions; promote public participation to ensure better alignment between the economic, social and ecological aspects; and services with regard to planning, legislation, plantation development management and other technical services in a coordinated, efficient and effective manner. The oil palm development strategy is spelled out into eight key measures: (1) increase production, productivity and quality of sustainable oil palm plantations, (2) develop palm oil as a commodity, (3) bolster support for a food security system, (4) increase investment in the oil palm sector, (5) develop a plantation management information system, (6) develop human capital, (7) develop institutions and partnerships, and (8) build support for natural resource and environmental development. The plantation development strategy essentially focuses on resource and environmental development oriented towards commodity (CPO) production. This strategy is supported by eleven policies that seek to increase production for sustainable and transparent oil palm development. The eleven policies are (i) develop smallholder plantations through the estate revitalization program, (ii) boost productivity, (iii) use and distribute prime plants, (iv) integrated pest control, (v) human resource development, (vi) recycle waste and by‐products, (vii) infrastructure development, (viii) business development, (ix) foster business partnerships, (x) apply a sustainable oil palm plantation approach, and (xi) develop an information system. These estate development policies are still production oriented. When these policies are linked to other regulations, the focus on production‐driven development becomes even clearer. The strategies and policies mentioned earlier have applied the necessary cultivation and manufacturing technology for palm oil and its derivatives. However, this strategy has failed to take into account emerging issues related to oil palm expansion, specifically with regard to sustainable oil palm development (social, environmental and governance dimensions). 65
The estate development strategies and policies also tend to emphasize on the technological and macro‐economic aspects. Aside from the regulatory framework, the orientation of oil palm development should also take into consideration other sectoral policies that support oil palm development in Indonesia. In view of this, the existing strategies and policies therefore need to be revised and improved in a view to reduce inequalities and minimize environmental issues and social conflicts. 66
Chapter III Plantation Legislation Expands Industrial Estates, Shrinks Smallholder Plantations “Biofuels are integrating agricultural and energy industries and opening new roles for some countries in the global economy, the global political dynamics that they reveal are less novel. These dynamics appear likely to mimic the patterns that others have observed in the palm oil industry, with the emerging economies of the South integrating their economies with Northern countries and multinational companies, in complex relationships that blur the lines between donors and recipients of aid, and producers and consumers of goods.” (Dauvergne and Neville 2009;1097‐8) A.
Legislation Widen Inequalities Long before Indonesia gained independence, the larger part of the country has been turned into plantations, among others for the cultivation of clove, nutmeg, cocoa, tea and oil palm. The opening up of forests for estates by Governor General Van den Bosch through the Cultuurstelsel program marked a historic milestone for Indonesia’s plantation sector. At the time it was done in response to the growing demand for spices by European countries, primarily the Netherlands. The development of oil palm plantations during the post‐independence era further intensified. Known also as Elaeis, the oil palm has changed Indonesia’s development landscape, specifically in the plantation industry. In 1958, Dutch‐owned estates were nationalized, bringing them under the control of a state‐run company. The process however was short‐lived due to the failure of Soekarno’s Old Order nationalization agenda. When the New Order came to power, Law No. 1/1967 on Foreign Investment was issued. The law provided an entry point for large‐scale foreign investments into Indonesia along with various privileges and facilities, including in the plantation sector. In 2007, a new foreign investment law was issued through Law No. 25/2007 on Capital Investment by revising the previous policy which now confers investors with more freedom and making no distinction between foreign and domestic investment. Although the oil palm industry boomed in the 1980s, it only saw rapid growth in the past decade in line with the fossil fuels energy crisis, triggering global climate change. Given the ongoing fossil fuel depletion crisis and an increasingly erratic global climate, Indonesia has shifted its orientation to renewable energy such as biofuel. The development of agrofuel, particularly biodiesel from palm oil is inextricably linked to a European Union policy on biofuel action plan and strategy. The EU is the largest consumer of this type of renewable energy. Based on the biofuel action plan and strategy, in December 2005 the EU has set a 10 percent consumption target for biofuel as a source of energy by 2020 or roughly 1 – 1.5 million tons of biofuel. 67
The EU has prepared several evaluation reports on biofuel known as the Assessment of EU Commission on Biofuel. According to the assessment report, the ambitious biofuel consumption target requires substantial economic investments. A holistic policy is therefore necessary to bring down economic costs incurred for meeting the target. In the report, the EU Commission recognizes the fact the tropical countries have the highest biofuel productivity (ethanol, biodiesel), and that biofuel production costs are lower in developing countries. The report explicitly highlighted on biodiesel production in certain countries such as Indonesia and Malaysia, and their export potential63. The government has also shown considerable support for agrofuel development in Indonesia, especially with palm oil and sugarcane as its raw material. This policy was initiated and issued by other ministries apart from the Ministry of Agriculture (see table 1). Year Policy Substance
2006 Presidential Regulation No. 5 National energy policy
Presidential Instruction No. 1 Requirements and use of agrofuel as an alternative source of energy Agricultural Ministerial Regulation No. 33 Estate development through plantation revitalization program Finance Ministerial Regulation
No. 117 Credit for agroenergy development and plantation revitalization 2007 Agricultural Ministerial Regulation No. 26 Guidelines on plantation permits Energy and Mineral Resource Ministerial Regulation No. 51 Criteria and implementing guidelines for traders of biofuel as an alternative energy 2008 Oil and Gas Directorate General Decree No. 13A83 Standardization and specification of biodiesel as an alternative energy for the domestic market 2010 Government Regulation No. 10/2010 Permit for release of forest areas restricted only to convertible production forests and no other consideration for forestlands that among others are intended for protection, production and conservation functions 2012 Government Regulation No. 60/2012 Opportunity to apply for the release of forests for oil palm plantations in converted forest areas and the exchange of areas for companies in production forests 63
Communication From The Commission- An EU Strategy for Biofuels, p. 6 68
Matters related to plantations are specifically regulated through Law No. 18/2004 on Plantation. Agricultural Ministerial Regulation No. 26/2007 was then issued to provide guidelines for plantation permits and was later revised in 2013. The expansion of several programs, specifically through the plantation revitalization agenda and financing guarantee from the banking sector, is governed through Finance Ministerial Regulation No. 117 on Bioenergy Development Loans which constitutes as political support for massive oil palm expansion in Indonesia. These policies illustrate that high CPO consumption levels to feed global energy demand have impelled and reinforced the adoption of a development paradigm oriented towards large‐scale oil palm plantations in Indonesia. Small wonder when corporations are awarded various privileges and facilities to step up expansion efforts. In terms of control over oil palm plantations in Indonesia, at present a wide gap is evident whereby 65% (major private corporations 55% and state‐owned companies 10%) are industrial estates and the remaining 35% are smallholder plantations. Data from the Directorate General of Plantations shows that in 2006 the composition was still balanced between smallholder plantations and corporate‐run estates (see Table 3). No Company Estate Size /Ha Percent 1.
2.
3.
4.
5.
6.
7.
467.9 350.0
288.9 208.9 189.9 60.9
3,141.8 7.85% 5.87% 4.85% 3.51% 3.19% 1.02% 52.73% 8. State‐owned Plantations 696.7 11.69% 9. Smallholder Plantations 2,120.3 35.58% Raja Garuda Mas Wilmar Group Guthrie Bhd Sinar Mas Group Astra Agro Lestari Cilandra Perkasa Group Private Plantations BPS, Directorate General of Plantations, 2006 data compilation Papua is projected to be the subsequent target of the national oil palm development scheme. This is reflected in various government policies such as MP3EI that sets aside land for large‐
scale plantations in the central and eastern part of Indonesia, one of which is the Merauke Integrated Food and Energy Estate (MIFEE). In the original plan, MIFEE was to extend across 2.6 million ha but later rationalized to 1.2 million ha. A.
Marginalized Oil Palm Growers One of the key stakeholders in the oil palm industry is the farmers. Numerous data have shown that farmers cultivate only 36% of Indonesia’s oil palm plantations at an average size of 2 ha/household. According to GAPKI, the proportion owned by farmers is much higher at 42% of total oil palm hectarage. Smallholdings at present cover roughly 3,773,526 hectares. 69
Meanwhile, private plantations stretch across 4,617,686 hectares and state‐owned oil palm estates reached 683,227 hectares. Plantations cultivated by the people themselves consist of more than 1,920,000 smallholdings. As mentioned earlier, land control is undoubtedly unbalanced. The main contributing factor is Law No. 18/2004 on Plantations that only allow individual farmers to manage 2 – 25 hectares of land for oil palm cultivation. This is reinforced by Agricultural Ministerial Regulation No. 26/2007 which sets a 20% limit for smallholders. This is much different than the policy undertaken by the New Order administration which allow the people control over up to 60% of estates (see Agricultural Ministerial Decree No. 333/kpts/KB.50/6/1986)64. Existing policies only impose an upper limit in land size held by a company within a given region. Land control is among the many elements that reflect inequality in terms of land size, not to mention other agricultural inputs such as technology, seed and fertilizer nearly all of which are under the control of major corporations. Furthermore, banking policies also curb access to much needed financing by oil palm smallholders. The Oil Palm Farmers Union (SPKS) has identified several persistent issues confronting oil palm growers. 1.
Legality of Farming Business The majority of independent farmers in Indonesia do not hold an oil palm plantation certificate. Farmers in general only have a land‐use notification letter issued by the village chief. This is due to the prohibitive fees in applying for a plantation certificate which can set farmers back to as much as IDR 3‐4 million. Bureaucratic red tape and a lengthy process add to farmers’ reluctance in arranging for a plantation certificate. On the other hand, corporations can lay claim to a piece of land simply by presenting a HGU permit issued by the local government through BPN (National Land Agency). Not surprisingly this has led to land disputes in various regions. 2.
Oil Palm Seeds Apart from the issue of business legality for yields to be acceptable to the market through the green mechanism promoted by international bodies such as APEC, farmers also face difficulty in accessing certified oil palm seeds. Large corporations on the other hand can easily obtain these seeds, some even may be able to independently produce them because these companies have secured green certification from competent institutions. Thus far, oil palm farmers have been obtaining their seeds from suppliers without definite legal status. As a consequence, crop yields cannot be exported due to absence of green certification. Furthermore, nurseries and seed producers can only be found in Sumatra. Many independent farmers have bought pre‐
nursery seedlings which they then develop on their own. There are eight seed producers that 64
The previous nucleus‐plasma plantation policy – Agricultural Ministerial Decree No. 333/1986, Article 10 clause 2a stipulates a 20 : 80 ratio between nucleus and plasma estates, whereas Agricultural Ministerial Regulation No. 26/2007 specifically Article 11 states that plantations set aside for the people should be at a minimum of 20% of total area cultivated by companies. 70
control nearly the entire domestic oil palm seed business, and among the largest is PT London Sumatra, one of the earliest oil palm plantations in Indonesia65. 3.
Land Size and Dispersed Plantations Despite data showing that oil palm growers have fairly large parcels of land to cultivate on, the State through its regulations only allow farmers to own less than 25 hectares. In reality, land tenure varies depending on the size of the land owned by farmers. Lands are also located at a distance from each other due to HGU permits awarded to corporations by the government. 4.
Oil Palm Marketing System On the marketing front, farmers are unable to haul their agricultural yields to the processing plant due to financing shortage for transportation. Crop yields will therefore almost certainly be handed over to middlemen at a low selling price. It is rare for farmers to independently market their products directly to the palm oil mill. 5.
Transport Infrastructure Independent oil palm plantations passed on from one generation to the next typically have poor road infrastructure, made worse by the fact that these estates are not within the same contiguous location. Bad road conditions make it difficult to transport yields. The considerable distance between the plantation and processing facility has left farmers with no other choice but to rely on middlemen selling way below market price. 6.
Access to Financing and Credit In different parts of Indonesia, a common issue among farmers is capital shortage for increasing agricultural production. This also applies to oil palm growers. Alas, credit facilities offered by both national and multinational banks are mainly targeted at large‐scale oil palm plantations. Two banks in particular – HSBC and Bank Mandiri – award specific attention to the financing of oil palm estates. By May 2010, Bank Mandiri has disbursed 76.91 percent from a staggering IDR 32.8 trillion worth of loans for the plantation and manufacturing/trade sector to oil palm estates alone! The amount of credit channeled to the oil palm sector and its manufacturing industry also continues to see an upward trend. In 2008, bank loans amounted to IDR 19,041 trillion and surged to IDR 25,283 trillion in 2010. From this huge amount of bank loans set aside for oil palm plantations, virtually none were received by independent growers who total three million people. Banking institutions have mentioned that they are unwilling to take on the risk of providing credit to smallholders. This only serves to widen the disparity between independent oil palm growers and industrial plantations. B.
Oil Palm Puts Other Food Crops At Risk The massive expansion of oil palm plantations poses a serious threat to food sovereignty. In the province of Jambi, oil palm estates reached a total of 819,237 hectares or eight times the 65
La Via Campesina. Industrial Agrofuel. 2009 71
size s
of rem
maining rice fields whiich only co
over 143,03
34 hectares. In 2008‐2
2010, conveerted croplands c
r
reached 75
5,560 hectaares in thiis provincee, most of which weere turned into transmigrat
t
tion areas (T
Trans‐PIR) w
whereby th
he entire 60,,000 hectarees of land allocated forr food crops were c
converted iinto oil palm
m estates. Th
his places Jaambi at the top priority
y among reggions most vulner
m
rable to food
d insecurity
y66. This largge‐scale con
nversion of rrice fields m
means that Jambi can c only meeet 11.7 peercent of itss rice needss or a meree 350 tons annually frrom a minimum demand of 3
d
3,000 tons each year677. To meet tthe rice needs of the prrovince, Jam
mbi must im
mport from other p
f
provinces su
uch as Westt Sumatra, SSouth Sumatra, Central Java and Eaast Java. According A
to Ign Kristaanto, the exxpansion of f land area ffor the culttivation of o
oil palm is m
made possible p
by clearing large swathees of forestllands in Sum
matra and Kalimantan
n. At the current rate, r
hectarage will exxpand twenty‐three‐folld in the neext 30 yearrs. The sizee of forest areas a
converted c
in
nto oil palm
m estates has h increaseed from yeaar to year. IIn 2007 tottal area reaached 4,741,194 h
4
ha and contiinues to exp
pand over ttime. In the province of Riau alonee, land alloccated for oil palm f
cultivation covers 1,16
611,859.68 ha, in Centrral Kaliman
ntan at 619,8
868.37 ha, w
while total t
oil pallm plantation expansion in Kalim
mantan’s forests reach
hed 3,360,851.1 ha. Th
his is portional to
directly pro
d
o Kalimantaan’s rate of deforestation which cu
urrently has lost 58% of its forests at a r
f
rate of 2.83 million ha//year. Inequitable I
ween Smallh
holders Prod
ductive Lan
nd and Industrial Oil Palm Land Alloccation Betw
Plantations P
in Kalimanttan Data D
from the Indoneesia Farmeers Union ((SPI) conceerning the conversion
n of produ
uctive cropland c
in Upang Dellta and Telaang Delta III in Banyu Asin, A
South
h Sumatra shows s
that since 1969 1
these regions aree known ass food prod
ducers contributing 50
0% to South
h Sumatra’ss rice supply, but s
due to the o
opening up of road acccess in 2000
0 existing laands were ttaken over b
by oil palm invest
p
ors. Anotheer example o
of land conv
version is in
n the districct of West P
Pasaman in West Sumatra. Be
S
efore 1990, this region was a rice p
production centre with
h rice fields covering no
o less 66
Kompas, 19 JJuly 2010. Bulog Divisi Jambi, 2010 in a joint hearingg with Commisssion III of Jamb
bi’s provincial parliament by Yayasan Setarra 67
72
than 27,168 hectares, but have shrunk in size following investments in oil palm plantations beginning 1981. In 2005, West Pasaman had 16,127 ha of rice fields, which experienced a cumulative reduction of 1,287 ha from 2005 to 2007, leaving a total of 14,840 ha rice fields in 2007 (BPS 2008) from which 4,953 hectares were cultivated for corn. According to the local agricultural office of Pesisir Selatan, West Sumatra (Padang Today 2/4/2009) at least 1,293 hectares of rice fields in Pesisir Selatan also grew smaller in size in the past five years due to conversions into plantations and for housing. Only 30,466 ha of rice fields are left from which each farmer’s household own a mere 0.5 ha of land.68 BPS data (2010) shows that land conversion arising from oil palm expansion tends to increase each year. In North Sumatra for example, at least 39,669 ha of agricultural land was converted in 2005‐2006 or approximately 7.55 percent of irrigated rice fields in the region. Land was specifically transformed into oil palm plantations and other sub‐sectors other than food crops. Nearly 40 thousand hectares of land in North Sumatra were converted in 2005‐2006 across 13 districts. Land conversions primarily took place in South Tapanuli, Asahan and Labuhan Batu, each stretching across 10,455 ha, 7,373 ha and 6,809 ha respectively. In Labuhan Batu, one of North Sumatra’s main rice producers, the conversion of rice fields into oil palm estates reached an average of 5,000 ha annually. The conversion process gathered pace following massive oil palm expansion in North Sumatra. According to data released by Sawit Watch, plantations were expanded to 1,913,224.25 hectares in 2008 which later increased to 1,956,331.02 hectares in 2009. Hectarage further expanded to 1,996,402.48 hectares in 2010, then 1,999,574.74 hectares in 2011 and 2,000,149.24 hectares in 2012 (Medan Daily). C.
Oil Palm and the “Green” Ambition In reference to the road map prepared by the Directorate General of Plantations, it is clear that production will be stepped up if need be to meet global demand, specifically from European countries. Amid growing concerns over environmental (green) issues due to the worsening fossil fuel energy crisis, bioenergy will undoubtedly be given greater attention within the global energy scheme. Consequently, oil palm development policies will be directed toward meeting this need for renewable energy. A well‐intended ambition indeed in the effort to tackle the ongoing energy crisis, yet has courted criticisms specifically in relation to the world’s increasingly unpredictable climate. Certain facts and field findings appear to argue against the “green” agenda. Instead of helping to improve the climate and shift the paradigm from dirty to clean energy, environmental issues seem to have multiplied in addition to the recurrent episodes of social conflict. FAO data reveals how the oil palm business adds to greenhouse gas emissions due to the production, distribution and consumption of biofuel, sometimes even much more than fossil fuels. This is due to a shift in land‐use patterns required for the massive expansion of oil palm plantations. “It is impossible for biofuel production to significantly enhance the energy security of developed countries. This requires extensive land allocation, thus making it impossible” (FAO 2009; 4‐5). 68
http://www.spi.or.id/?p=3047 73
Existing biofuel policies are simply replacing one problem with another, and shifting the burden from the middle class to the poor. The fuel needs of the middle class with their culture of consumerism along with growing demand for energy unfortunately are satiated through the systemic marginalization of the poor and underprivileged69. The World Development Report 1992 has responded to the development and environmental challenge. Environmental protection is an essential part of development. Without adequate environmental protection, development will be undermined; without development, there will be a scarcity of resources for the required investments, and environmental protection will fail ….growth has often caused serious environmental damage70. Apart from the alarming rates at which deforestation is taking place in forests and peatlands, oil palm expansion also puts biodiversity at serious risk. IUCN data reveals that the existence of at least 236 plant species and 51 wildlife species in Kalimantan is endangered and this worrying situation shows no signs of abating. The main cause is the unbridled clearance of forests for the expansion of oil palm estates. To date, Indonesia has the world’s longest list of endangered species, a total of 1170 species. This excludes species that have not been named but are already extinct71. Another equally important environmental issue, apart from land conversion and biodiversity loss, concerns the production process itself. The oil palm cultivation process requires an interrupted supply of water. As a consequence, oil palm plantations are mostly found in areas close to the source of water such as the river. Opening up land for estates lead to soil compaction. Through this monoculture approach, the upper fertile layer of soil is worn away by erosion. Oil palm needs 20‐30 liters of water/day/tree. Apart from being water‐hungry plants, oil palms also take in plenty of nutrients, thus are heavy users of fertilizer. If non‐
organic fertilizers are applied, the soil will become nutrient deficient and will have implications to other areas. 69
Jagdesh Rao, New Agriculturist, March 2008 World Bank Report 1992, p. 2 71
www.iucnredlist.org 70
74
Chapter IV Conclusion and Recommendations Alternative Strategy and Policy The oil palm development paradigm has shifted away from being oriented towards productivity, technology and macro‐economy for export purposes to meeting the domestic demand for palm oil. The oil palm development road map for 2014‐2018 has been revised to be more oriented towards sustainable plantations for smallholders by empowering millions of oil palm growers in Indonesia to be able to cultivate the crop without having to open up new forest areas or peatlands. Plantation revitalization is further optimized through legislation that focuses on allocating land for smallholders, enabling them to work collectively by promoting oil palm farmers’ cooperatives in a bid to boost agricultural productivity and ultimately allow the people of Indonesia to prosper. This policy is expected to help prevent conflicts that have long taken place. Changing the orientation of bioenergy policy from merely focusing on oil palm to all other agricultural commodities that can produce biofuel will contribute significantly in tackling issues on greenhouse gas emissions and biodiversity depletion. Estate development policies should push for collective actions that promote commodity ownership without prioritizing oil palm which has clearly undermined efforts to ensure the people’s safety and well‐being and conserve the environment. Recommendations To effectively deal with various dimensions of inequality in existing oil palm policies, the following preconditions should be met: 1. Bring an end to corporate oil palm expansion, while optimizing plantations. This calls for genuine agrarian reform that includes land redistribution in favor of farm workers and smallholders in rural areas which should be accompanied with the ability to self‐determine food crops that the people prefer to cultivate. 2. Strengthen independent farmers in the oil palm sector to improve their production process in order to meet national palm oil demand. This requires solid and formidable oil palm farmers’ organizations that can retain their estates from being pressured by the nucleus‐
plasma scheme. 3. Provide access and privileges to individual farmers in obtaining the required production facilities and equipment, and loans. 75
4. Corporations must apply the principle of free, prior and informed consent and withdraw (or terminate) company operations in areas where their presence is rejected by the local community. 5. Minimize environmental impacts through good governance that makes it obligatory for corporations to comply with prevailing environmental laws and regulations, adopt an integrated pest management approach without pesticides and recycle wastewater from palm oil mills. 6. The government needs to conduct an environmental and social audit towards the oil palm industry and impose stringent sanctions for violations and undesirable consequences, and fully provide legal protection to affected communities. 76
REFERENCES – Ben White, 2009. Laba Kuasa di Cat Warna Hijau – Jurnal Tanah Air Walhi, p. 236 – Colchester, Marcus. 2007. Promised Land: palm oil and land acquisition in Indonesia­
Implications for Local – Communities and Indigenous Peoples. Forest People Programme, Moreton‐in‐Marsh and Sawit Watch. Bogor – Dauvergne, Peter and Kate J. Neville (2009) “The Changing North‐South and South‐
South Political Economy of Biofuel”, Third World Quarterly 30 (6), 2009:1087­1102 – Direktorat Jenderal Perkebunan, 2009, Statistik Perkebunan: Kelapa Sawit. Directorate General of Plantations, Jakarta. – Direktorat Jenderal Perkebunan, 2010. Road Map Pembangunan Kelapa Sawit. Directorate General of Plantations, Jakarta. – Direktorat Jenderal Industri Agro dan Kimia, 2009. Roap Map Pengolahan CPO. Directorate General for Agro and Chemical Industry, Jakarta. – EU Commission. Communication From The Commission­ An EU Strategy for Biofuels. 2006 – GAPKI. 2009. Membangun Indonesia dengan Kelapa Sawit. Infosawit, Jakarta – Hambali, E. 2009. Contribution of Higher Education and Research Institutions – Http://medanbisnisdaily.com/news/read/2013/04/06/22000/konversi_lahan_pertani
an_picu_kenaikan_harga_pangan/#.UyqeJ6iSxk0 – Jiwan, N.2009. “Political economy of the Indonesian palm oil industry: A critical analysis”. – Presentation at ISEAS Workshop on the Oil Palm Controversy in Transnational Perspective. Singapore: Institute of Southeast Asian Studies, March 2009. – Kementerian Kehutanan, 2010. Rencana Strategis 2010­2014. Ministry of Forestry, – Jakarta. – Oil World. 2009. Oil World Annual 2009. ISTA Mielke GmbH. Langenberg, Hamburg, – Germany. – Perencanaan Strategis untuk Menghadapi Abad 21. PT. Gramedia Pustaka Utama, – Jakarta. – Serikat Petani Kelapa Sawit ( SPKS), 2012, Training Praktik Penilaian Tanaman Kelapa Sawit, Bogor. – SawitWatch. 2008. Losing Ground the Human Rights Impact of Oil Palm Expansion in Indonesia. Bogor – Via Campesina, Industrial Agrofuels Fuel Hunger and Poverty, Notebook N°1, Jakarta, 2009 – Vermeulen, S. And Goad, N. 2006. Towards better practice in smallholder palm oil production. Natural Resource Issues Series No. 5. International Institute for Environment and Development. London, UK. – World Bank, 2001, The Quality of Growth; Gramedia Pustaka Utama 77
INEQUITABLE TAXATION IN INDONESIA: BASELINE MAPPING OF POLICY AREAS AND OPTIONS IN AN EFFORT TO TACKLE THE ISSUE Ah Maftuchan72 Abstract Income inequality has become a much talked‐about global issue in the last decade. It arises from the inequitable distribution and control of natural resources. Public policies – taxation, labor, education, health and others – that are inconsistent with the principles of justice and equity also contribute to widening economic and non‐economic disparities. Another causal factor is an unfair market mechanism. Taxes as a fiscal policy can essentially function as an instrument for fair and equitable economic distribution. However in practice, taxes are instead a source or cause of economic inequality. Tax rates that put the wealthy and super‐wealthy at a more advantaged position are proof of this paradoxical effect. Keywords: income inequality, tax policy, tax inequality. Introduction “Every time people try to punish the rich, the rich don’t simply comply, they react. They have the money, power, and intent to change things. They do not just sit there and voluntarily pay more taxes. They search for ways to minimize their tax burden. They hire smart attorneys and accountants, and persuade politicians to change laws or create legal loopholes. They have the resources to effect change... The poor and middle class do not have the same resources. They sit there and let the government’s needles enter their arm and allow the blood donation to begin. Today, I am constantly shocked at the number of people who pay more taxes, or take fewer deductions, simply because they are afraid of the government. And I do know how frightening and intimidating a government tax agent can be” — Robert T Kiyosaki, Rich Dad, Poor Dad. 72
Governance and Social Policy Specialist, Perkumpulan Prakarsa and Commissioner, Independent Budget Commission (KAI).
78
The issue of inequality has drawn mounting attention in the past one or two decades. Income inequality is among the issues garnering the most attention worldwide. It has been a much‐
discussed subject to the extent that public attention has shifted away from non‐income inequality issues (social disparities). The notion that ‘social equality is harder to measure than money inequality’ as contended by Noah Smith is probably one of the reasons for this. Income inequality is in fact much easier to measure and comprehend. As part of economic inequality, income gap illustrates a situation where disparities exist between the percentages of the population relative to resources, including income received by the said population. Numerous countries across the globe have experienced increasingly worrying levels of economic inequalities. Luebker (2011) regards this drastic rise in economic disparities as the worst ramification of globalization. Luebker was probably arguing against the Kuznets curve theory introduced by Kuznets (1995). Kuznets does not consider economic inequality as a problem but instead sees it as necessary for growth. The emergence of the rich sets the economic wheels in motion, creating more employment opportunities. The employed population can therefore earn a livelihood, thus elevating their well‐being. Citing Luebker, economic globalization however has debunked Kuznets theory. A globalized industry that transcends national and geographical boundaries has led to increasingly expansive industrial activities. Consequently, massive capital accumulation due to reckless human greed can no longer be effectively measured. The extractive industry has made it possible for natural resources to be siphoned off from one country to another at such frenetic pace that seems to know no borders. Stiglitz (2012) stated that the highest earners in the United States that represent 1% of the population have control over 40% of national assets. This has been a cause for concern for President Obama who considers high income inequality as the most profound challenge facing the United States. In Indonesia, Yusuf, Sumner and Rum (2013) made an estimate of the evolution of income inequality in the country from 1990 to 2012. By applying the Gini coefficient73 and decile dispersion ratio,74 it was evident that Indonesia’s income inequality has hit heights unmatched in the country’s history. Indonesia’s Gini ratio was 0.33 in 1990 and rose to 0.41 in 2012. CEDS of University of Padjajaran (2013) released estimated figures for 2012 which showed that the wealthiest 20% take in 49% of national income, while the poorest 40% are only left to enjoy 16% of national income. Meanwhile, the richest 10% have become wealthier with a twelve‐fold income increase compared to the bottom 10%. Inequality needs to be measured periodically. Two basic concepts should to be taken into account in measuring income inequality: (i) private sector income inequality (earnings before tax and transferred to the public), and (ii) income inequality in terms of disposable income after direct tax and public transfer. Direct tax refers to taxes imposed directly upon the taxpayer and cannot be transferred to other parties, such as income tax. These two approaches are also known as primary and secondary income distribution (Luebker: 2011). Meanwhile, 73 Measuring inequality based on the Lorenz curve which makes a comparison between the distribution of a specific variable (income
or income per capita) and the uniform distribution of a variable that represents equality. The curve’s horizontal axis shows the
cumulative percentage of households from poor to rich, while the vertical axis indicates cumulative expenditure or income.
74 A simple and basic inequality measurement that presents the ratio of the average consumption of the richest 10% of the population
against the average consumption of the poorest 10%. This approach can be interpreted by expressing the income of the richest 10%
of the population as a multiple of the income of the botttom 10% or those in the poorest decile. 79
Todaro and Smith (2006) used two measurements to analyze income distribution: (i) size distribution of income that directly calculates the earnings of each individual or household, and (ii) functional or factor share distribution of income that measures total national income received by each factor of production (land, labor and capital). To examine the root cause of inequality, available sources of reference need to be reviewed. From various sources it can be inferred that income inequality is attributed to several factors that include: (i) the unequal distribution or control of natural resources; (ii) differential treatment or appreciation between those who toil to earn a living and others who need not put in as much effort; (iii) individuals are socially coerced to work or not to work in all lines of work based on specific disciplines; (iv) public policies (taxation, labor, education, health, etc.) that have a bearing on the quantity and quality of the distribution of existing resources. Apart from these four aspects, inequality in general can be the result of an unbalanced market mechanism and unfair tax policies and distribution (Kenworthy & McCall: 2008). From the foregoing explanation, a simple deduction that can be drawn is that in the event of widening disparities in a population, inequality will also worsen. To curb disparities, several experts have suggested on the need for income distribution. In relation to this, an instrument that can be forced upon by the government is redistribution through tax collection and distribution. Carter and Matthews (2012), two OECD tax experts, pointed out on the important role of tax policies in reducing inequality by improving wealth distribution through more transfers, either through the delivery of basic services (education and health), infrastructure development or cash transfers. Carter and Matthews added that progressive taxation can be a means for the government to redistribute income. This approach will prompt financial reforms that should not only be about pursuing growth but also oriented towards distributive justice. Duncan and Peter (2012) in their work Unequal Inequalities: Do Progressive Taxes Reduce Income Inequality? further elaborated that a progressive tax structure is capable of narrowing inequalities, primarily in creating a climate with redistributive impacts. In reference to Fozzard (2001), collected taxes that have become part of public funds must be directed towards meeting citizen preferences and for ensuring justice by reducing poverty and social disparities. Tax policies and practices on the other hand also bring problems that need to be dealt with. In numerous countries, taxation has instead become a source or cause of inequality. The super‐
rich are paying fewer taxes compared to the upper‐middle income earners due to low tax rates. As put forward by Kiyosaki and cited in the early part of this paper, the rich will unrelentingly seek ways, either legally or illegally, to minimize their tax burden. Bahagijo (2014) in Super­
Tax for France’s Mega­Rich and Indonesia’s 2014 Elections (INFID Analysis No.1) brought attention to the meager contribution of the ultra‐rich in paying taxes. Musgrave and Musgrave (1984) added that theoretically, a persistent issue in the implementation of a tax regime concerns the distributive justice of tax burdens for different income groups. In various countries, tax contribution to total state revenue is typically higher compared to state revenue from non‐tax sources. In Indonesia, taxes contribute to an average of 72 – 74% of total state earnings. In 2012, total state earnings amounted to IDR 1,358.13 trillion of which 74.8% is derived from tax collections (Ministry of Finance, 2013). This average is in fact below the target for every fiscal year. In the past few years, the tax revenue target has never been met. In 2013, total tax revenue was 91.31% from the target set by the revised national budget 80
for 2013, the lowest performance in the past three years. In preserving Indonesia’s existence as a nation, the relationship among citizens and between citizens and the government should be based on a set of values and instruments. One of the principles that can help maintain these relationships is upholding justice. With justice, citizens shall be equally treated, with regard to their fundamental rights and obligations as citizens of the state. Furthermore, distributive justice of goods and services (justitia distributiva) will be more equitable and enjoyed by all. Every citizen shall be able to exercise their rights based on their roles and contributions. Citizens on the other hand will also have basic rights that are not based on their roles and contributions (justitia cummulativa). Justice however is based on transactions (sunallagamata), both voluntary and involuntary. Distributive justice is often used for measuring government policies with regard to the people. The state’s responsibility towards citizens therefore is perceived to be greater than the people’s obligations towards the state. The government must therefore distribute resources under the people’s control in a fair manner. In this context, it would indeed be more important to implement the principle of distributive justice. However, when citizens are expected to fulfill their responsibilities such as their tax obligations, the principle of commutative justice becomes more of a priority. Concerning the issue of tax burden and distribution that leads to inequality, it is therefore necessary to look into areas where tax inequality has arisen. How should inequitable tax burden and distribution be dealt with to ensure tax justice? This paper will attempt to provide answers to both questions. As a baseline mapping exercise, this paper will be far from comprehensive. This paper would serve its purpose if it inspires others to conduct further studies for a more in‐depth understanding of this subject matter. The scope of this paper will not go beyond measuring tax‐benefit incidence in terms of (i) who will truly bear tax burdens; and (ii) who will benefit the most from public spending. This is because a study of benefit incidence requires special effort and the involvement of tax and econometrics experts. Inequitable Taxation: Baseline Mapping In the presence of distributive and cumulative justice, every individual will be able to benefit from taxes through social programs or others which will ultimately reduce inequalities. In addition, distributive justice will also help lay a more concrete foundation to ensure equality before the law. In view of this, reasons for the urgent need to address taxation and tax inequality include the following: (i) taxes are a vital and most sustainable source of development financing; (ii) taxes can pave the way for upholding distributive justice. Through fair and just fiscal and monetary policies, the government will be able to make a difference for the people consistent with the principles of social justice as enshrined in Indonesia’s constitution. This is because of the transfer of resources from high‐income earners to low‐
income earners through fiscal (tax) policies. Sources of tax revenue and the transfer of tax resources are the key to reducing tax inequality. From the author’s research, several areas of inequality taxation have been identified: 1.
Sources of Tax Revenue Pursuant to the Income Tax Law, sources of tax revenue in general can be distinguished into: personal, undivided inheritance as a whole to replace the rightful heir, statutory bodies and 81
permanent p
establishmeents. In sim
mplified term
ms, these sources are caategorized o
only as perssonal and statutor
a
ry bodies. The official n
number of taaxpayers by
y 2013 is prrovided belo
ow: ble 1: Numb
ber of Taxpaayers in Indonesia (DJP
P, 2014) Tab
Taxpay
yer Individual Statutory b
body Treasurer Total taxpaayer 2009 13,861,253 1,608,337 441,986 15,911,576 2010 16,880,649
1,760,108
471,833
19,112,590
2011 19,,881,684
1,,929,507
507,882
22,,319,073
2012 22,131,323 2,136,014
4 545,232 24,812,569 3 2013
23,082,822
2,218,573
555,995
25,857,390
From the sta
F
atistics abov
ve, it is evid
dent that thee number of individuall and corporrate taxpayeers is far f from ideeal. With a population
n of 237 million peoplle (2010) o
of which 10
0‐11% are poor, p
individual taxpayers off only 23 million m
are ssurely far frrom adequaate. If exam
mined furtheer, in comparison
c
to the inco
ome tax con
ntribution o
of the rich, employees contribute far much more. m
This is gove
T
rned in Artiicle 26 of th
he Income T
Tax Law (div
vidend, interest, discou
unts and ben
nefits related to gu
r
uarantees, lloan repaym
ment, royaltty, rent and miscellaneo
ous income associated with the t use of property, p
an
nd others) which w
sets a lower peercentage co
ompared to
o componen
nts in Article 21 (s
A
salary, wagee, honorariu
um, allowan
nce and oth
hers). Statuttory bodies (Articles 25
5 and 29) in fact si
2
ignificantly contribute to tax reven
nue (see Figgure 1). Tax Revenue from Non‐Oil and Gass Sources Figurre 1: Total T
Given the co
G
onsiderablee number off wealthy in
ndividuals in
n Indonesiaa, the counttry’s tax rev
venue potential p
from the ricch is in facct immensee. Relevant data can b
be drawn from f
the reeport prepared by
p
y the Deposiit Insurancee Institution
n (DII) that rreleased infformation o
on the numb
ber of national ban
n
nk accountss and nomin
nal amount o
of Third Parrty Funds (T
TPF) deposiited in bank
ks. 82
Figure 2: TPF by Nominal Segment (DII, September 2013) No Nominal Deposit (Rupiah and Foreign Currency) Account
Percent
Nominal Percent
1 N ≤ 100 m 127,733,160
97.5%
534,175.34 15.13%
2 100 m < N ≤ 200 m 1,450,383 1.11%
197,617.60 5.60%
3 200 m < N ≤ 500 m 956,074 0.73%
305,432.68 8.65%
4 500 m < N ≤ 1 bn 402,540
0.31%
293,395.22 8.31%
5 1 bn < N ≤ 2 bn 205,772 0.16%
283,578.67 8.03%
6 2 bn < N ≤ 5 bn 107,710
0.08%
339,427.08 9.61%
7 N > 5 bn 63,128 0.05%
1,577,488.54 44.67%
In 2013, Perkumpulan Prakarsa Jakarta has compiled data from DJP and BKF of the Ministry of Finance concerning the contribution of various tax sources relative to total tax ratio. In 2012, with a tax ratio of 13.3%, the percentage contribution is as follows: (i) income tax at 6.2% with the following breakdown – personal income tax 1.2%, corporate tax 2.3%, others 2.8%; (ii) value‐added tax at 4.1%. From both sources (income tax and VAT), at least 10.3% from 13.3% tax ratio has been accumulated. This means that the highest tax burden is borne by individuals (employees) and the entities where they work for along with their consumption. Revenue realized from income tax in the 2010 national budget with regard to Article 12 of the Income Tax Law (employee income tax) amounted to IDR 55.3 trillion (18.6% from total income tax revenue) and Article 25/29 on personal income tax (non‐employees) at only IDR 3.6 trillion (1.2% of total income tax revenue). This is evidently unfair because the contribution of individual entrepreneurs who should be included in the high net‐worth individual category is instead insignificant. We can therefore deduce that the small number of individual entrepreneurs registered as taxpayers has affected the amount of tax revenue (Prastowo, 2012). 2.
Tax Rate: High for Middle­Income, Low for the Rich The principles of taxation are equality, certainty, convenience of payment and efficiency. These four basic concepts are essential, primarily the principle of equality as taxes collected by the state should be according to the capacity and income of taxpayers (Tjahjono & Husein, 2000). A flat tax would in fact mean that the government is being discriminatory to taxpayers. A socially equitable approach in terms of taxation would be to impose different rates for taxpayers. The higher the income, the higher the amount of taxes that a taxpayer must report and pay. Conversely, low income would mean fewer taxes to report and pay. This constitutes economic justice that ultimately leads to social justice. 83
The prevailing tax rates are also another form of inequitable taxation, in addition to tax brackets where different tax rates apply for different income levels. In Indonesia, the income tax rates (resident taxpayer) applicable to taxable income are as follows: 



Up to IDR 50 million, 5 percent tax rate. Over IDR 50 million to IDR 250 million, 15 percent tax rate. Taxable income over IDR 250 million to IDR 500 million, 25 percent tax rate. Taxable income over IDR 500 million, 30 percent tax rate. The rates on the taxable income of resident corporate taxpayers and permanent establishments are as follows: 



Up to IDR 50,000,000, 10% tax rate. Over IDR 50,000,000 to IDR 100,000,000, 15% tax rate. Over IDR 100,000,000, 30% tax rate and pursuant to government regulations, the highest rate can be lowered to a minimum of 25%. Non‐resident taxpayers for 20% of gross income, or according to the Tax Agreement applicable for the said non‐resident taxpayer. Given the tax rates for individual and corporate taxpayers described above, it appears that the principle of justice does not entirely apply as they have created inequality in terms of tax rates and burden borne by taxpayers. As an illustration, an individual with IDR 100 billion in wealth will be paying the same rate of 30% as those with a net worth of IDR billion and so forth. This structure of tax bracket is clearly unfair. The ultra‐rich will ultimately only pay a fraction of the percentage imposed on middle‐income earners. The state will therefore not be earning tax revenue as much as it potentially can, and consequently there will be fewer resources to distribute to citizens. 3.
Tax Incentive: Inequitable Policy From Planning Phase Apart from the issue of tax sources and rates, inequitable taxation can also be observed with regard to tax incentives. Tax incentives are mostly offered to entrepreneurs. In giving out these incentives, does the prudent principle and openness apply? Tax incentive policies often lack transparency and as a consequence awarding such privileges to large‐scale businesses can undermine justice. To reduce inequality with regard to taxation in order to ensure tax justice, tax incentives should also be available to the low and middle‐income earners. The government’s ‘preferential’ treatment to major businesses, both domestic and foreign, is indicated for example in Finance Ministerial Regulation No. 130/PMK.011/2011 concerning Corporate Income Tax Exemption or Reduction Facility (Tax Holiday). The tax holiday facility for corporate income tax is introduced under the pretext of encouraging foreign investments into Indonesia. In reality, incoming investments are mostly for the extractive industry given Indonesia’s abundant natural resources. This policy will undoubtedly be counter‐productive to efforts in increasing tax revenue from corporate taxpayers. 84
4.
Sub­national Tax Ratios: Widely Divergent The diverging trends of tax revenue among regions in Indonesia are of utmost concern. Sub‐
national tax ratios (comparison between tax revenue of a given region and the value of an economy’s output or Gross Regional Domestic Product/GRDP among regions) widely varies. The tax ratio of provincial governments in 2012 in general saw a declining trend compared to 2008. The South Sulawesi provincial government has the highest tax ratio at 10.00 percent, whereas Central Sulawesi registered the lowest at 0.67 percent. A high tax ratio is attributed to low GRDP and even lower sub‐national tax collections. Figure 3: Tax Ratio by Province in Indonesia, 2008 ‐ 2012 Source: Bappenas, December 2013. Tax ratios at the district/city level are even more troubling. The following table presents 5 districts/cities with the highest tax ratio, and 5 districts/cities with the lowest. Table 2: Tax Ratio by District/City (Top 5 and Bottom 5, 2011) 1.
2.
3.
4.
5.
Top 5 District/City Badung (Bali) Tomohon City (North Sulawesi) Karimun (Riau Islands) North Buton (Southeast Sulawesi) South Tangerang City (Banten) Bottom 5 District/City Puncak (Papua)
Sorong (Papua) (West) Mesuji (Lampung)
North Nias (North Sumatra) Tax Ratio 15.94%
14.8
6.76%
4.27%
1.
2.
3.
4.
3.96%
5. East Kutai (East Kalimantan) Tax Ratio 0.00%
0.03%
0.03%
0.04%
0.04%
(Bappenas: 2011 – compiled) 85
The ratio of locally generated revenue (LGR) relative to total income of districts/cities of each province in Indonesia is not much different than the tax ratio among provinces. Bappenas (2013) observed a rise in total income for 2012 when comparing data from 2008 to 2012, with the exception of the provinces of Aceh, Riau and Riau Islands. The highest LGR ratio is attained by DKI Jakarta at 60.98 percent, and lowest by West Papua at 3.33 percent. Meanwhile, 12 provinces have recorded LGR‐to‐total income ratio above the average ratio for districts/cities in a given province (15.88 percent). Figure 4: LGR‐to‐Total Income Ratio of Districts and Cities by Province Source: Bappenas, December 2013. Inequitable Distribution: A Portrait of Fiscal Spending 5.
Fiscal spending is a means to distribute available resources. Distribution through fiscal policies helps to ensure that the income gap among the people is not overly wide, and national revenue share can be measured and sustained. To this end, the spending posture for each fiscal year can serve as an indicator to determine the extent to which fiscal spending reflects optimal distribution. In the past several years, the lion’s share of fiscal spending was for government employment expenditure and routine spending. Government spending which should be intended for “the prosperity of the people, to the greatest extent possible” has instead shifted to “the prosperity of bureaucrats and public officials, to the greatest extent possible”. Government employment expenditure75 should not exceed spending for development and social welfare. Government employment expenditure refers to monetary and in-kind payment determined according to existing legislation to state
officials, civil servants and employees on government payroll but have not been conferred civil servant status as compensation for
work undertaken, except work related to capital formation. This expenditure component includes salary, benefits, honorarium,
overtime pay, social contribution and other employee-related expenses.
75
86
This is to ensure that the national budget does not only benefit bureaucrats, public officials and politicians, but more importantly the public at large. In the future, the payroll and allowance scheme of civil servants, military and police personnel and state officials should be designed in such a way that does not squander public funds, nor put a strain on the national budget. Any decision to increase remuneration or allowances should not only be approved by parliament, but the public should also have a say in the matter. If the national budget only allows for narrow fiscal space partly due to substantial government employment expenditure as a consequence of the swelling ranks of civil servants along with their pay rise, a restructurization policy is therefore crucial and only then will the management of state finances reflect social justice. Social justice runs parallel with the concept of creating “prosperity for the people, to the greatest extent possible”. National budget policies that embrace the principle of social justice should therefore take into account adequate and equitable social spending76, capital expenditure77, materials expenditure78, and subsidies79. According to the OECD country average, social expenditure is considered adequate when total allocation accounts for at least 20% of total GDP. In OECD tradition, social spending covers health expenditure (Social expenditure: Aggregated data, OECD Social Expenditure Statistics, 2013). If the OECD benchmark is considered too high for Indonesia, the percentage of total social spending may range between 10 and 15% of GDP. In reference to Lindert (2004), social spending includes: (i) social transfers that cover cash compensation for unemployment, retirement and health, and (ii) social transfers along with government subsidy for education. Based on Lindert’s study (Growing Public: Social Spending and Economic Growth since the Eighteenth Century Vol I, Cambridge University Press, 2004), cogent historical and factual evidence shows that substantial social spending (and high yet proportional taxation) will help strengthen the economy and bring collective prosperity. The fact however remains that Indonesia’s social spending is still dismally low. The 2012 revised national budget has only set aside 3.4% (amount +‐ IDR 48 trillion) of total national budget for health expenditure. Even fuel subsidy expenditure, which has incited heated debate because of its staggering amount of which its effectiveness is still seriously questioned, is much lower than the amount earmarked for government employment expenditure. In the existing financial system, items under the “social aid” category include cash or in-kind transfers offered to the public to protect
against potential social risks. This expenditure seeks to elevate the well-being of the people, non-continuous and selective in nature.
Other expenditure categorized as social spending includes those that cannot be classified under the aforementioned expense items
which include non-recurring and uncommon expenditure such as in response to natural disasters, social disasters and other
unexpected expenditures.
76
Capital expenditure refers to budget expenses allocated for acquiring or increasing fixed assets and other assets that provide
benefit for more than an accounting period and exceed minimum capitalization of fixed assets or other assets as determined by the
government.
77
78 Materials expenditure refer to the purchase of consumable goods and services to produce goods and services, either marketed or
not, and the procurement of goods to be transferred or sold to the public, and official travel expenses.
79 Subsidies refer to budget allocated by the government to state-owned enterpirses, government agencies or other third parties that
produce, sell, export or import goods and services in a view to ensure affordable prices for the people to meet their necessities of life.
This component consists of subsidy expenditure in financial institutions, fuel subsidy, non-fuel price/cost subsidy, non-fuel credit
interest subsidy, non-fuel tax subsidy, other non-tax subsidy and PSO subsidy.
87
Figure 5: Fuel Subsidy Expenditure Compared to Government Employment Expenditure, 2012. Closing From the baseline mapping described earlier, it can be concluded that inequitable taxation refers to inequity in tax burden and distribution which in due course will undermine the fundamental principle of tax justice. In simpler terms, inequity occurs when “the really rich pays less tax than the middle class or poor, yet the wealthy are benefiting more from tax distribution than the less well‐off.” Taxation therefore is a source of inequality. To fulfill the principles of justice, tax policies should commensurate with the financial condition or income of the taxpayer. Nevertheless, several experts opined that equitable tax policies and distributive income through taxation can be a way out to reduce both economic and social inequalities. Hubbard (2014), Dean of Columbia Business School, in an op‐ed for Washington Post recently contended that tax reform is the best way to narrow income inequality. Moene and Wallerstein (2003) in Kenworthy and McCall (2008) suggested that inequality can be reduced by introducing social programs, such as unemployment insurance and health, making sure that they are accessible in a transparent manner to allow every person to genuinely benefit from them. Recommendations Given the abovementioned situation, aside from the need for a more in‐depth study on inequality in taxation, including with regard to tax‐benefit incidence, the author also recommends the following policy options that can be taken into consideration: 1. The government needs to put in more serious effort in increasing the number of taxpayers, primarily among rich individuals and employees, to reach an ideal percentage between registered taxpayers and prospective taxpayers. Efforts to increase the number of taxpayers should be directed at both corporate and individual taxpayers; 88
2. The need to broaden the tax base among others by levying taxes on the informal sector at the upper‐mid‐scale and on financial futures transactions. Furthermore, the government should not hesitate to raise tax rates, particularly for the mega‐wealthy; 3. The government can offer tax incentives through the inclusion of non‐taxable income for female employees with head‐of‐household status, elderly workers, people with disabilities and other vulnerable groups. The government can also grant a tax exemption for the poor for the purchase of agricultural production equipment and so forth. The author appreciates the government’s decision to increase the limit for non‐taxable income as of 1 January 2013 from IDR 15,840,000 (unmarried taxpayer without dependents) to IDR 24,300,000; for married taxpayers without dependents from IDR 17,160,000 to IDR 26,325,000; and married taxpayers filing a joint return (without dependents) from IDR 33 million to IDR 50,625,000. The government however has shown lack of gender and disability sensitivity. There should be a non‐taxable income policy as tax incentive for women‐headed households, elderly workers, people with disabilities and other vulnerable groups. Lowering the non‐taxable income limit for unmarried taxpayers without dependents may also be considered; 4. To ensure that taxation serves the purpose of achieving social justice, the tax bracket policy should be revised by adding an additional bracket. For the purpose of reducing inequality, it is recommended that the government apply a 35‐40% rate for those earning over IDR 5 billion annually. A tax bracket where the same 30% rate is levied on individuals with a net worth of IDR 100 billion and those with IDR 500 million in wealth is unfair; 5. The government may earmark specific taxes (sin taxes and on the extractive industry), both at the national and sub‐national level, to be allocated for basic services such as education, health and cash transfers for the poor. This is to ensure that an instrument is in place to guarantee the distribution of resources to those really in need; 6. To urge local governments to build their tax collection capacity especially as the collection of land and building tax, and underground and surface water tax are already under their authority; 7. The need to increase social spending and implement social programs, both through the targeting and universal approach, to ensure optimal distribution of resources through fiscal policies. *** 89
References: 














Bahagijo, Sugeng, 2014. Pajak Super Kepada Superkaya Perancis dan Pemilu Indonesia 2014 (Analisa INFID No 1); Bappenas, Analisis Kesenjangan Antarwilayah 2013; Carter, Alan and Stephen Matthews, How tax can reduce inequality, OECD 2014, http://www.oecdobserver.org/news/fullstory.php/aid/3782/How_tax_can_reduce_ine
quality.html ‐‐ Accessed on 22 January 2014, 14:53; Duncan, Denvil and Klara Sabirianova Peter, Unequal Inequalities: Do Progressive Taxes Reduce Income Inequality?, Boon Germany: IZA DP No. 6910, October 2012; Fozzard, Adrian. 2001. The Basic Budgeting Problem: Approaches to Resources Allocation in the Public Sector and Their Implications for Pro Poor Budgeting, London: Overseas Development Institute; Hubbard, Glenn. Tax reform is the best way to tackle income inequality, http://www.washingtonpost.com/opinions/tax‐reform‐is‐the‐best‐way‐to‐tackle‐
income‐inequality/2014/01/10/112710ea‐68ca‐11e3‐a0b9‐249bbb34602c_story.html January 11, Accessed on 22 January 2014, 14:51 Kenworthy, Lane and Leslie McCall, 2008. Inequality, public opinion and redistribution, Socio‐Economic Review (2008) 6, 35–68; Kiyosaki, Robert T and Sharon Lechter, 2000. Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money – That the Poor and Middle Class Do Not!, USA: Warner Business Books; Kuznets, S., 1955. Economic growth and income inequality. American Economic Review, 49: 1‐28; Lindert, Peter, 2004. Growing Public: Social Spending and Economic Growth since the Eighteenth Century, Vol I, Cambridge University Press; Luebker, Malte. The Impact of Taxes and Transfers on Inequality, TRAVAIL Policy Brief No. 4 ILO (05 August 2011); Musgrave, Richard Abel & Peggy B Musgrave, 1984. Public Finance in Theory and Practice, The McGraw‐Hill Companies; Stiglitz, Joseph E., 2012. The Price of Inequality, W.W. Norton; Todaro, Michael P. and Stephen C. Smith, 2006. Pembangunan Ekonomi, Jakarta: PT Erlangga; Yusuf, Arief Anshory., Andy Sumner and Irlan Adiyatma Rum, The Long­run Evolution of Inequality In Indonesia, 1990­2012: New Estimates and Four Hypotheses On Drivers, Working Paper in Economics and Development Studies, No. 201314, September 2013, Center for Economics and Development Studies, Department of Economics, Padjadjaran University. *** 90
INEQUALITY AND THE EDUCATION AND HEALTH CARE PRIVATIZATION POLICY 80Mike Verawati Tangka Abstract The purpose of privatization conceptually does not entirely lead to undesirable effects on condition that its principles and actual implementation are intended for the best interest and betterment of the people. The education and health sectors primarily are vital for building a strong, blissful and dignified nation. Privatization of the education and health sectors in Indonesia has strayed away from its basic principle of putting the people’s welfare at the forefront. In certain hospitals, public health care and medicine supply is inaccessible to the poor who should be the primary beneficiaries of public services to ensure that the people receive first‐rate health care. Human capital in Indonesia has not developed at a pace that allows the people to withstand the blows of a crisis due to costly education and low rates of higher education participation. The concept of privatization thought to be a means to boost performance and establish more facilities for the people has instead widened inequality. A new paradigm is therefore needed to regain the momentum for improving education and health services in the interest of the people. 80
Author is a staff member of the Indonesian Women’s Coalition for Justice and Democracy, Coordinator of Working Group on Public Policy Reform. 91
CHAPTER I Introduction An educated society leading healthy lives is a key indicator for a country or region to be called prosperous. Physical and mental health will allow a person to deal with different life situations, while a knowledgeable society helps build a strong nation of exceptional quality, dignified in the eyes of the world. Health and education is undoubtedly the foremost prerequisite for every country to actualize prosperity. In practice however, countries abide by different concepts for creating well‐being. Countries such as Finland, Norway and Sweden regarded as prosperous nations see education and health care as national investment, ensuring that people of all layers of society regardless of wealth and status have access to public services and optimally benefit from them. In addition, state revenue, in this case taxes, has been consistently used for fulfilling the fundamental rights of the people, specifically in the education and health sector. Given the less than positive reflection described briefly in the earlier section, one cannot help but harbor a sense of envy towards advanced countries that guarantee quality education and health care with first‐rate medical treatment available to every citizen who need not worry about prohibitive fees or be fearful of not having the money to seek medical help. For Indonesia’s rich minority, sending their children and grandchildren to study overseas is more than possible, not to mention the ability to pay for health check‐ups in the finest hospitals in Singapore or the United States. Millions of Indonesia’s poor however must think more than twice to put their children to school at the basic level, much less until higher education. Public schools may be easier on the parents’ pocket, some even free of charge, but putting a child to school still means having to fork out money for miscellaneous expenses such as textbooks (that change every school year), uniform (that parents must buy from certain vendors appointed by the school) and other “fees” that put a strain on family finances. The underprivileged in Indonesia can only pray that they stay healthy because even the thought of falling ill is enough to evoke fear. Fearful of medical expenses that must be settled or discriminatory treatment and the bureaucratic red tape that they must go through simply for being poor. Latest data published by BPS (Indonesia Central Bureau of Statistics) showed that 28.07 million people live in poverty. This figure differs by a wide margin with data from the TNP2K (National Team for Accelerating Poverty Reduction) which recorded a total of 98 million poor people in Indonesia and is predicted to soar correspondingly with economic inflation. The foregoing reality highlights only a smidgen of the true adverse consequences arising from the country’s policy‐making on the privatization of the education and health sector. The vision enshrined in Indonesia’s 1945 Constitution to advance the intellectual life of the people and create a just, prosperous and civilized nation has simply become a process that leads to ever‐
widening inequality in society, causing unending sufferings and afflictions to Indonesia’s swelling ranks of the poor. Commercialization as a derivative of the government’s privatization policy has instead deprived the people from accessing education and health services. The desired outcomes of this well‐intended purpose of helping people overcome crisis have not been directly proportionate to the sharp rise in education and health care costs as a consequence of the commercialization of hospitals and schools. Due to the government’s 92
inability to control and manage the private sector, the people are caught in an increasingly complex cycle of crisis. Given the situation above, this paper shall discuss on how privatization policies, primarily in the education and health sector, do not necessary go hand in hand with the purpose of promoting the intellectual potential and improving the well‐being of the nation. This highly depends on whether the government taking the lead in the implementation of privatization policies is supported by a sound conceptual framework grounded in the sovereignty of the State with the main purpose of fulfilling education and health care needs. Policies that regulate on the delivery of quality education and health services should not simply hand over the responsibility to the private sector through a market‐oriented approach. A Portrait of Education in Indonesia Since the government imposed a 20% budget allocation for the education sector, efforts have been made to restructure the education system in a view to hasten improvements and seek workable solutions to Indonesia’s myriad of educational problems such as low school enrolment rates, high drop‐out rates, and worrying illiteracy rates among the productive‐age group. These issues arise as a consequence of minimum education budget set aside by the government. In 1996, UNESCO made a comparison of the education budget of various countries and observed that in 1992 developed countries on average have earmarked 5.3% of their GNP for education, developing countries at 4.2% of GNP, while underdeveloped nations at a mere 2.8% of GNP which is consistent with Article 49 clause (1) of Law No.20/2003. Similarly, in 2003 World Bank data showed that Indonesia’s education budget was 1.4 percent of GDP, Vietnam at 2.8 percent of GDP and South Korea at 5.3 percent of GDP. The comparative data of countries worldwide released by UNESCO and World Bank clearly reveals how Indonesia has the lowest education expenditure. In 1992, UNESCO found that at the time when the government of India allocated 89 percent for the education sector, Indonesia was only willing to commit 62.8 percent for education.81 81
Kebijakan Anggaran 20% di Indonesia; http://wrihatnolo.blogspot.com/2009/04/kebijakan‐anggaran‐pendidikan‐20‐
persen.html 93
Source: The World Bank, Education in Indonesia: Managing the Transition to Decentralization (Indonesia Education Sector Review), The World Bank: Washington D.C., 2004, Volume 2, pp. 2­4. Education issues remain to the focus of government attention, particularly as Indonesia’s Education For All (EFA) Development Index has fallen over the years. In 2011, Indonesia’s ranking slid to 69th place among 127 other countries compared to 65th position in 2010. Developed by UNESCO, Indonesia’s EFA development index for 2011 was lower than Brunei Darussalam (34) and four steps below Malaysia (65).82 One of the reasons for this dismal performance is Indonesia’s rising drop‐out rates. At least half a million primary school children and 200 thousand lower secondary students are unable to continue with their education. Education data in 2010 showed that 1.3 million children aged 7‐15 are at risk of dropping out from school. A report published by the Department of National Education stated that four children quit school every minute. Furthermore, the education sector is also troubled by other issues such as poor infrastructure. According to data from the Ministry of National Education, primary schools across Indonesia currently are equipped with a total of 899,016 classrooms of which 293,098 (32.6%) are damaged. As for lower secondary schools, Indonesia has a total of 298,268 classrooms and 125,320 (42%) of them are in poor condition. The situation is made worse by the lack of qualified teachers. The quality and competency of educators in Indonesia in general remains far from expectation. In terms of qualification, from 2.92 million new teachers roughly 51% have earned a bachelor’s degree or higher, while the rest have lower credentials. Similarly, concerning educator certification, only 2.06 million teachers or 70.5% of educators are certified, while the remaining 861,670 have not met certification requirements. There is also inequitable distribution of educators. Teacher shortages for schools in urban, rural and isolated areas are 21%, 37%, and 66% respectively. Indonesia in overall faces a severe lack of teachers reaching 34%, whereas many regions experience a surplus of teachers. Furthermore, 82
Permasalahan Pendidikan di Indonesia; Kacung Maridjan 2012 94
in 2010‐2015 at least 300,000 teachers for all educational levels will be retiring, thus the urgent need to find replacements in order to ensure the continuity of learning processes.83 An inconsistent education curriculum also adds to the long list of problems. The curriculum changes almost every year which is not only burdensome to students but also means rising costs. Another equally critical factor is the fact that education carries a steep price tag. To put a child to kindergarten or primary school will costs IDR 500,000 – IDR 1,000,000, some even charging more than IDR 1 million. Costs commensurate with educational level. Enrollment in lower and upper secondary schools will set you back IDR 5 million which can be much more expensive if you can afford schools that offer better quality education. The rising cost of education is inextricably linked to a government policy that adopts the school‐based management approach (SBM). In reality, this approach has been translated into fund‐raising drives. Consequently, a school committee or education board which functions as an SBM organ must include representation from the business community. This is based on the assumption that entrepreneurs have broader access to funding. As a consequence, once a school committee has been established any fees imposed by the school are justified as being “in compliance with the school committee’s decision”. A non‐transparent selection process for committee executives and members has allowed nepotism to thrive. School committees therefore simply function as the legitimator for policies introduced by the school principal. Likewise, SBM provides a legitimate excuse for the government to relinquish its responsibilities in dealing with education issues. The Elusiveness of Universal Access to Higher Education Improvement targets for the formal education sector can be achieved with firm government commitment and efforts demonstrated through various acceleration programs particularly relating to the Millennium Development Goals (MDGs) that envision to increase net enrolment rates, expand the proportion of grade 1 students who succeed in finishing their primary education, and raise literacy levels to 100% for both males and females aged 15‐24 by 2015. How about access to higher education? Unfortunately, a 20% increase in the education budget does not guarantee students who have completed their twelve‐year compulsory education in moving on to a higher level. A bachelor’s degree is in fact one of the criteria for entry‐level jobs in many companies, institutions and industries, and a consideration in determining remuneration. In overall, access to higher education has improved, particularly during the reform era, but in absolute terms, it remains dismally low. At the national level, tertiary education enrollment rate is no more than 12% in 2012. Furthermore, improved access to higher education is mostly enjoyed by those from the high‐income group. This is evident in 2012 data which shows that 30% of students entering college come from 20% of the country’s wealthiest, whereas only 2% represents the poorest 20%. This gulf between the enrollment rates of the rich and poor has widened in the past five years. The surge in post‐secondary education enrollment rates in the past five years is in fact dominated by those from affluent backgrounds. Within a span of five years (2007‐2012), higher education enrollment rate for the richest 20% rose almost 5% from 25% to 30%. 83
www.kemendiknas.go.id Wajah Persoalan Pendidikan di Indonesia 95
Meanwhile, in the same period, for the bottom 20% the participation rate only increased 1.5 percent84. Lack of Realization of Health Rights and Services With regard to health indicators, Indonesia has not fared well if examined from its maternal mortality rate (MMR) that has instead worsened from 288 per 100,000 live births in 2010 to 359 per 100,000 live births. It appears that the MDG target of pushing the rate down to 102 per 100,000 live births by 2015 will indeed be difficult to meet. Apart from MMR, malnutrition is another serious issue for Indonesia which is also the cause of the rise in maternal and infant mortality rates. Health infrastructure, such as the availability of puskesmas (community health centers) is equally crucial as Indonesia currently only has a total of 7,550 health care units, in addition to 22,002 sub‐health centers and 6,132 mobile clinics. Although these primary health facilities are available in every sub‐district, access remains inequitable. Facilities are not fully accessible to the people, both in terms of cost and distance. Meanwhile, the referral system of hospitals established in nearly all districts/cities is not functioning as expected. Health facilities that should cater to the needs of the people even those in the remotest of areas are severely inadequate. Furthermore, puskesmas is not within easy reach due to poor infrastructure. Indonesia also faces an acute shortage of health workers. According to a World Bank study, Indonesia only has 13 physicians for every 100,000 population which is the lowest ratio in Asia. The World Bank study also found that nearly 40% of doctors are absent from duty as they have been following the working hours set by the central government85. With regard to human resources, the main issue concerns the inefficiency and ineffectiveness in handling health problems. Despite an increase in health human resource ratio, it remains far from Indonesia’s 2010 health target, while ratios between regions are widely divergent. Given current statistics on health workers who graduated from related institutions, it would be hard to meet the expected target. In 2003, the health worker to population ratios are 17.47 general practitioners, 5.2 specialists, 108.53 nurses, and 28.40 midwives per 100,000 population. Indonesia has set its own good manufacturing practices (GMP) for medicines and health products that include 220 generic drugs. Consumption of generics and traditional medicines has seen an upward trend, and 95% of national medicine demand is domestically supplied. This also applies for vaccines and certain health equipment. Nevertheless, their availability, quality and safety remain far from optimal and cannot be easily accessible by all. Furthermore, traditional Indonesian medicine has not been developed to its fullest extent. Safety and quality control of food and drugs covers supplementary food, traditional medicine, cosmetics, therapeutic products or medicine as well as narcotics, psychotropic drugs and other addictive substances including the investigation of criminal offenses. Indonesia also faces scarcity for all types of health workers. 84
Peningkatan Akses terhadap Pendidikan Tinggi Lebih Banyak Dinikmati Masyarakat Kaya; http://keberpihakan.org/page/articles/3 85
See World Bank, 2008 “Investing in Indonesia’s Health: Challenges and Opportunities for Future Public Spending”. World Bank. 2008, p. 4 96
Commercialization of Health Facilities and Services Among health‐related cases repeatedly exposed by the media concern the plight of the poor denied medical attention from doctors and puskesmas workers simply for not being able to pay for treatment, much less for consultation. This is only one of the realities that reflect how health care in Indonesia is a luxury. Changing the status of public hospitals to state‐owned enterprises and private establishments has only doubled the costs borne by patients. More worryingly this status change has mostly been implemented at the sub‐national level. Hospitals in Indonesia, 2003­2008 Ministry of Health 2009 No Management and 2003 2004 2005 2006 2007 2008 Ownership 1 Ministry of Health 31
31
31
31
31 31
2 Provincial, district/city 396
404
421
433
446 446
government 3 TNI (military)/POLRI (police)
112
112
112
112
112 112
4 State‐owned enterprises 78
78
78
78
78 78
5 Private sector 617
621
626
638
652 653
TOTAL 1,234 1,246 1,268 1,292 1,319 31 This is because health providers assume that quality is directly proportional to commercialization. As a consequence, there has been a recent proliferation of international standard hospitals that emphasize on exclusive services rather than promoting the health and saving the lives of the people at large. Rising hospital prices in a number of regions across Indonesia are one of the direct consequences of privatization policies. In Kupang, the privatization of Yohannes General Hospital has driven costs to skyrocket to up to 600%. In nearly all regions, the status of local public hospitals has been changed to become general service agencies (BLU, badan layanan umum). The concept of BLU is actually a move towards privatization (semi‐privatization). Under the BLU concept, every hospital has the liberty to manage its own affairs, including finances. Once they have been designated BLU status, many hospitals have raised their prices. In Purwokerto, Central Java, costs have even soared to 300%. A similar situation is also found in Denpasar, Bali where the rate for inpatient third‐class room and board has risen from IDR 11 thousand to IDR 33 thousand.86 Furthermore, due to economic liberalization policies, hospitals are now open to foreign investment that allows 67% foreign ownership. This unlocks the door for the entry of foreign‐owned hospitals. 86
Source: http://www.berdikarionline.com/editorial/20111114/kesehatan‐rakyat‐dihadapan‐pasar.html#ixzz2xvqEayfx 97
98
CHAPTER 2 Education and Health Care Privatization Policy Privatization in Indonesia Privatization or the sale of national assets to the private sector is an increasingly prominent phenomenon since the wave of reform sweeping over Indonesia following the demise of the New Order regime. Not only in Indonesia, virtually every developing country has opted for privatization as the preferred national economic policy as recommended and dictated by international agencies. International institutions such as IMF and World Bank are convinced that handing over the management of public services such as education, clean water and health to private operators will solve the people’s economic crisis and welfare issues. The reality however is quite the reverse. For Indonesia in particular, education, health care and clean water has become increasingly inaccessible.87 IMF and the World Bank are international agents with a significant stake in pushing developing countries to implement privatization policies. For every signing of a letter of intent on financial aid for developing countries, IMF and World Bank will never fail to include a privatization conditionality which the recipient government must comply with. The privatization policy is part of an effort to align with the neo‐liberal economies of many advanced nations. The problem lies in the fact that the social, economic and political conditions of developing and developed countries are poles apart. In high‐income countries, privatization proceeds smoothly with tight government control over the private sector, whereas in their less developed counterparts, complying with the conditionality imposed by international agencies to release government control of public services would instead create breeding ground for corruption, collusion and nepotism. This is due to the weak functioning of regulations supportive of a competition‐conducive climate, and unambiguous rules of the privatization game. Privatization soon became a controversial issue sparking sharp criticism from different elements in society for its serious implications. First, the inflated prices of public goods and services that the people must bear. Second, fewer employment opportunities. Third, absence of rules that regulate privatization, thus it is designed largely for increasing market gains than social services. Fourth, poor communities are deprived of access to public goods. Fifth, control of national assets wrested away from the public. Sixth, instigates new forms of corruption in the governance of national assets. A.
Education Privatization Policy in Indonesia Law No. 20/2003 on National Education System sets forth three building blocks for the privatization of educational institutions, one of which is financing that shall be the shared responsibility of the public and government (Article 46). This justifies the inadequacy of education budget allocated by the government, although it has exceeded 20% of the national 87
Excerpted from article “Privatisasi, Program Penyejahteraan atau Penyengsaraan?_pedestrian rhapsody.htm 99
budget. The government sees itself as only partially responsible for financing and any shortfall should be borne by the public. This is indicated in the following articles: Article 9 The public has the obligation to provide financial support for the implementation of education activities. Article 11 clauses (1) and (2) These clauses reduces government responsibility from an obligation to fulfill educational rights to merely “guaranteeing the implementation” of education programs. Article 12 clause 2 (b) This clause makes it obligatory for students to pay their share of educational costs with the exception of those waived from such obligations pursuant to prevailing laws and regulations. Article 53 Educational institutions as legal entities are defined as: (1) formal education providers and or units established by the government or public in the form of educational legal entities; (2) legal entities as set out in clause (1) shall function to provide educational services to students; (3) educational legal entities as described in clause (1) shall be based on the non‐profit principle and may independently manage finances for advancing the educational unit. Article 54 This clause stipulates that (1) public engagement covers the participation of individuals, groups, households, professional organizations, private sector and community organizations in managing and controlling the quality of educational services; (2) the public can participate as source, implementer and user of educational outcomes. By virtue of these articles, the government as the principal guarantor has shifted its responsibility in the implementation of education programs to the people through various mechanisms such as the school‐based management approach applied from primary to secondary education levels, and higher education autonomy. Education privatization is further reinforced through the following government regulations as derivatives of Law No. 23/2003 on National Education System: 1.
Government Regulation No. 19/2005 on National Education Standards a)
b)
Parental obligation to provide basic education for their children (Article 7 clause 2) Public obligation to provide resource support for the implementation of education programs (Article 9) 100
c)
Education financing shall be the shared responsibility of the government, local government and public (Article 46 clause 1) 2.
Government Regulation No. 47/2008 on Compulsory Education 3.
a)
Article 3 clause 2: Citizens aged 15 above shall not be financed by the government if they wish to finish their nine‐year compulsory education b)
Article 13 clauses 1, 3, 4 and 7: Promotes public participation in terms of financing Government Regulation No. 48/2008 on Education Financing The aforementioned policies further affirm the inclination to hand over the education system to ‘market mechanism’ which confers schools the autonomy to make their own decisions on education costs. Moreover, there appears to be a tendency among public schools, from primary to secondary level, to upgrade their status to so‐called international education standards. As a consequence, any additional financing required for educational investment or operations in order to meet international standards is imposed on parents. This makes education increasingly inaccessible to the people, especially the poor. In response to this ever‐widening gap in accessing education, the government has positioned itself as a donor or facilitator by introducing various forms of ‘assistance’ such as BOS (school operations aid), BOP (educational provider aid), block grants and scholarships. Types and Characteristics of Education Privatization in Indonesia 1. The commercialization of education means handing over the management function to the private sector with a profit‐oriented approach. 2. The public is burdened with the responsibility of financing education through the cost‐sharing or community cost model. 3. Local governments bear education costs through the implementation of the regional autonomy policy. B.
Health Privatization Policy in Indonesia In the past two decades, health policies have shown a strong inclination toward privatization for reasons that are mostly associated with the ongoing economic crisis which the government has conveniently used as an excuse to exonerate itself from the failure to adequately provide health financing. This tendency is obvious in the following government regulations: 1. President Decree No. 38/1991 on Self‐Financing Hospitals 2. Health Ministerial Regulation No. 159B/1998 on Development of Hospitals with Capital Ownership 101
3. 1990 PAKMEI Policy Package on Debureaucratization of Pharmaceutical Sector By partially releasing health service delivery to be managed by independent units, the government shall bear a lighter financing load. This is indicated in the trend among hospitals and puskesmas to add the word ‘self‐financing’ to their names. Policies in the last five years have strongly signaled that the government will be issuing the BLU policy. In today’s era of autonomy, privatization indeed seems to be an ‘impressive’ concept when the trend at the time it was first introduced (until now) has leaned more towards building professionalism, in terms of services and institutions, which was supported by numerous studies and trainings on reinventing government (defined as entrepreneurial bureaucracy). Policy reviews have given the impression that privatization is to the advantage of health service delivery. Intervention through training on professionalism for a puskesmas in the city of Blitar, East Java emphasized that good professional practice is demonstrated by the swiftness and accurateness of standardized services that are consistently delivered through firm commitments (by entering into written contract) which will ultimately result in an increase in patient visits. In the case of Blitar, local residents near the puskesmas have even complained about inconveniences caused by the upsurge in patient visits. 102
CHAPTER 3 Policy Analysis Prior to the implementation of privatization policy in Indonesia in the 1980s, several indicative signs were apparent, such as the fact that fewer public service sectors are facilitated directly by the government. This is consistent with the concept of privatization that sees a shift in functions and roles from the public to private sector (Cowan, 1990, 6)88. This shift actually does not necessitate a competitive environment, and as such public services greatly depend on market demand. Privatization can also mean a shift away from public service mechanism to market mechanism which creates competitiveness in the public service sector. Competition is intended to foster a win‐win situation among market players all for the purpose of making available high‐quality and affordable commodities (goods and services). The people will benefit from healthy competition as they can avail themselves to more appealing options and alternatives. Meanwhile, Savas (1987 : 3) in Privatization the Key to Better Government, puts forward that “privatization is the act of reducing the role of government, or increasing the role of the private sector, in an activity or in ownership of assets.“ On a broader scope, privatization is the key to government limitations and integrity: limitations in terms of size, scope and power due to other community institutions; integrity because the people’s needs are fulfilled in a more efficient, effective and equitable manner.89 Privatization of welfare services should be built on the assumption that in every aspect of inequality that arises, such as with regard to labor and capital, actors pursue political powers, not as an end in itself, but for delineating the boundaries between State and market with proper controls in place to ensure that the interests of beneficiaries, in this case the public, are optimally served (Korpi, 1987, p. 12)90. Privatization in Indonesia however has led to unproductive consequences at the expense of the poor who are powerless in bracing themselves against the profound impact of privatization which is highly influenced by market capitalism. Peter McPherson (1986) argued that the concept of privatization is essentially not entirely disagreeable on condition that 1) the government bolsters privatization policies with the commitment to revise economic policies that should take sides with the people 2) privatization does not pander to political interests as it will deviate from the original purpose 3) a one‐size‐fits‐all model is not applied as a benchmark for privatization effectiveness as its implementation significantly hinges on the 88
Privatization may be defined as the transfer of a function, activity, or organization from the public to the private sector. In this context, Cowan defines privatization more as a shift in a function, activity or organization from the public to private sector, but does not explicitly mention on the need for competition. 89
Collection of lecture notes on public policy administration, Kumpulan materi Kuliah Administrasi Kebijakan Publik, by Dwiyanto 2010: Blogspot Privatization – Membingkai Teori Privatisasi dalam Tesis; p. 2 90
Lennart J. Lundqvist, Explaining Privatization: Notes Towards a Predictive Theory, Scandinavian Political Studies, Bind 12 (New Series) (1989) 2, Gothenburg University 103
situation in which privatization is imposed 4) the market mechanism is under tight control to ensure that the privatization process is not hijacked by selfish, profit‐driven market interests.91 Privatization in Indonesia has led to consequences that have in turn given rise to a host of unending poverty issues as illustrated in the following analysis: 1.
Education and Health Care Privatization Policies Contribute to Povertization The privatization of the education and health sectors in due course reveals the inability of the government and State to improve the well‐being of the people which is significantly determined by education and health indicators. Privatization is not only applied in developing countries such as Indonesia. Advanced nations have also privatized certain vital sectors critical to public interests but without adversely affecting the people. In some of these countries, privatization has even further improved the quality of public services. This not only requires rigorous control from the State and people, but also the unswerving commitment of government administrators in genuinely working towards improving public services. Sectors vital for the people’s welfare are privatized with the necessary reform measures in the education and health sectors. Privatization in Indonesia leads more toward the undue control of education and health sectors by foreign owners or investors in pursuit of more prodigious gains which deviates from the original purpose of bringing prosperity to the people by making available quality education and health care. Excessive investor autonomy has encroached even into the most critical level, i.e., policies that should have been the privilege of the government to determine in the best interest of the people. Privatization that was initially intended to deal with economic woes, has increasingly contributed to the povertization of the people because commercial interests have all but eroded the state ideology that essentially takes responsibility in safeguarding the life, well‐
being and dignity of the people. Unchecked privatization also gives rise to non‐transparency and corruption which only causes misery and anguish for the people. Budget allocations which should have been utilized to the advantage of the people, have instead been used for matters that serve otherwise. The Increasing Compartmentalization of Society Privatization indeed does not instantaneously create inequalities in society, but the scope of its impact has clearly led to noticeable disparities. Focus on the provision of “premium” public services according to market demand will automatically drive service rates upwards, further excluding the disadvantaged and marginalized groups in accessing quality education and health services, who ironically represent a significant portion of the population in Indonesia. “The rich get richer” while “the poor become poorer” will ultimately incite social resentment that can change cultural values and norms. A society that previously share a sense of mutual empathy and mutual respect, willing to compromise with each other has changed into an individualistic and pragmatic society that uses conflict to suppress inequality. Society has 91
Anggita Cinditya Kusuma, Tinjauan literature dalam pengaruh privatisasi, p. 20, University of Indonesia, 2011 104
forsaken a conciliatory culture that engages on constructive dialogues to solve problems. In a village in Bulukumba for example, local residents vented out their anger and frustration for not receiving subsidized rice as promised by setting the village chief’s house ablaze. Furthermore, unilateral policies imposed by educational institutions or hospitals pursuant to bylaws, such as on the wearing of head scarves for students, gender‐segregated classrooms, hospitals adopting sharia principles and maternity clinics for Muslims, appear to increasingly focus on certain religious identities. Society therefore no longer clings to a culture of empathy to ensure a peaceful existence. Marginalized Groups Further Excluded with Widening Inequalities Education and health care privatization pushes marginalized groups further aside. Indigenous peoples, persons with disabilities, the elderly, women and the younger generation have been persistently sidelined in political and economic decision‐making processes that affect their lives. These groups who historically have been discriminated against, must even endure being denied their fundamental rights. Access to political participation is obstructed. Growing inequalities are not only confined to the macro level, but have also permeated into the micro level which may appear insignificant but if left to fester and accumulate will lead to weighty impacts. One of which is rising maternal mortality rates which is not only worrying at the country level, but also on an international scale as Indonesia is ranked the worst in its ability to lower maternal deaths. This is indeed a wake‐up call for the country and nation to rise up to the occasion. Privatization policies that do not serve the best interests of the people will unquestionably disregard the principles of equality, freedom, inclusivity and advancing the people’s dignity. Privatization will further reproduce inequalities as long as it remains preoccupied with profit and wealth hoarding, and even worse will ensnare the country deeper into a debt trap that not only weighs down the government, but also at the expense of future generations left with a legacy of unpaid debts. 105
CHAPTER 4 Conclusion and Recommendations Advocating Against Education Privatization Earlier sections have shown that the privatization of the education sector has increased school dropout rates and illiteracy levels among the poor. This is clearly in contradiction with amended Article 31 clause 2, 1945 Constitution that reads: “Every citizen has the right to compulsory basic education and the government has the obligation to provide financing”. In clause 4 it is asserted that “the State places priority on allocating at least 20% of the national and sub­national budget for educational funds in order to meet the needs for implementing national education programs”.92 Furthermore, policies aimed at privatizing the education sector are in contradiction with Law No. 39/1999 on Human Rights and the International Convention on Economic, Social and Cultural Rights that guarantee every citizen the right to education. At the international level, privatization policies are also inconsistent with the purpose of Education for All (EFA) and Millennium Development Goals (MDGs) that ensure universal access, without exception, to basic education by 2015. It therefore crucial for civil society to make all efforts to advocate against the privatization of Indonesia’s education sector. Advocacy that helps women, marginal and minority groups, indigenous communities and groups in difficult situations such as in conflict areas claim their right to education. The foregoing situation shows the impact of education privatization towards women and marginal groups, such as child workers and those who marry early, as they face difficulty in accessing education. As a consequence, rising illiteracy levels among women and children are partly due to the increasing number of children quitting schools among poor and marginalized communities. In this context, it becomes essential to develop education policies that allow a second chance for those who have dropped out of school or who have never gone to school. Alternative education curriculum and methodology is critical as formal education has failed to meet the needs of marginal groups. Alternative education should be adaptable to their specific needs. The advocacy agenda should be aggressively launched in an effort to uphold the people’s right to education. Advocacy of Literacy Programs Indonesia’s illiteracy rates in reality present a more dismal situation than pictured by the government through its official data. Immediate action is critical given the upward trend in illiteracy levels exceeding dropout rates for lower secondary schools and Madrasah Ibtidaiyah (Islamic‐based primary schools) that can reach 200,000 to 300,000 children each year. 92
Mari Bicara Fakta : Catatan Masyarakat Sipil atas Satu Dekade Pelaksanaan MDG’s di Indonesia ; Goal 2 Pendidikan Dasar untuk Semua dalam Ancaman Privatisasi Hak Dasar Rakyat 2012, pp. 24‐25 106
The government must undertake concrete actions to deal with this worrying trend by expanding state budget for literacy programs up to a minimum 3% of the education budget. This is in line with targets set by the Global Campaign on Education (GCE) and Asian South Pacific Bureau of Adult Education (ASPBAE). Functional literacy program funds only account for less than 1% of total education budget. The government should also develop literacy education program models and publish literacy education materials tailored to the specific character and situation of students. The continuity of learning programs must be guaranteed and designed according to local context. Existing literacy education programs are currently developed homogenously through a top‐down approach. In addition, the government is expected to augment facilities and hone the skills of program facilitators, increase teachers’ salary and consistently build their capacity. It would be more advantageous for the government and civil society organizations to regularly monitor literacy programs in order to hasten quality improvements. If required, the government can financially support civil society and other groups with proven competency in effectively conducting literacy programs. Policy Advocacy to Promote Gender Equality and Rights­Based Education It has been brought to attention from earlier explanations that illiteracy is far more prevalent among women than men. In light of this, actions should focus on narrowing this gap. An Edwatch census and data from the Indonesian government reveal higher illiteracy levels among females than males. Census figures show that 59.5% of women are illiterate, while government statistical data published by BPS (Central Bureau of Statistics) reveals that 67.9% of total number of illiterates are women in comparison to only 32.1% among men. One of the reasons for this disproportionality is the high rate of early marriage among women. The prevalence of child marriage warrants due attention as it is a contributing factor to rising illiteracy and school dropout levels. In advocating against early marriage, a major challenge concerns Law No. 1/1974 on Marriage. Under this law, the minimum legal age of consent for marriage is 16 for females. This somewhat provides legitimacy for early marriage. Regardless of the minimum age requirement, many girls in fact are already left with no other option but to marry young due to various reasons. It is therefore of utmost urgency to amend Law No. 1/1974, specifically concerning the minimum age which should be “18 above” for the purpose of protecting the rights of the child. Furthermore, the unwritten rules in certain schools that prohibit married and pregnant girls from continuing with their education should also be re‐assessed as they only serve to rob these girls of their right to return to school and given a second chance. More In­Depth Review of Education Issues In tackling Indonesia’s education problems, specifically pertaining to the reasons for privatization, it would be more effective to review policies on education privatization. Specific data should be collected on education issues that arise as a consequence of privatization, such as its impact on the people’s lack of access to higher education. Another possibility would be to 107
conduct a comparative study on privatization policies in different countries to gain insight into their successes and failures, along with the contributing factors. Advocacy Recommendations in the Health Sector At the time this paper was put together, the author shall only attempt to enlighten on what has been presented in earlier analyses and reviews which show a significant correlation between privatization policies in Indonesia’s health sector and the inability to realize the people’s right to health. The following measures therefore need to be initiated: Paradigm Shift in Indonesian Health Care Privatization due to government resource shortages in providing health services by partially relinquishing powers to the private sector in a bid to improve quality should be complemented with a health care paradigm in favor of the people to serve their best interest to the highest extent possible. The privatization process should be under tighter control, allowing the people full participation in overseeing the process. Health issues are essentially a political issue and in dealing with them, political commitment is therefore necessary. Some do not consider the health of the population as contributing much to socio‐economic development. Many policymakers regard the health sector more as a consumptive rather than productive sector that provides quality human resource. With this mindset, any instability in the economy will automatically mean no increases to the health budget. Re­assessing, Reforming Health Privatization Policy Regulations that shift the responsibility to deliver health services to the private sector should set forth clear boundaries and sanctions mechanism applicable to the private sector. Boundaries should be based on the assumption that health institutions are part of government commitment to provide the best for the people and not for certain groups. The sanctions and complaints mechanism should be in place to address discriminatory service delivery that hampers the people’s access to quality health care. Maternal and Infant Mortality Rates Considered as a “Public Health Emergency” Indonesia’s alarming maternal and infant mortality rates should serve as a strong reminder for the government and State to evaluate how the private sector and foreign investors operate their health business in Indonesia, specifically with regard to the tendency in pursuing profits rather than fairly and equitably providing services to the people. Steep medical and hospital fees, including unaffordable medicines have regrettably left an increasing number of patients untreated and unserved. Health programs, such as jamkesmas (public health insurance for the poor), jamkesda (local health insurance scheme for the poor) and jampersal (maternity insurance for the poor) have not been entirely effective due to the prohibitive cost of health care. Health Workers Who Uphold People­Centered Values The role of medical practitioners, dentists, nurses and midwives in promoting health that emphasizes on curative care, and helping people is of utmost importance. Health care and health promotion efforts should be managed in a more holistic manner by involving the public 108
collectively instead of individually. Health professionals should understand the concept of inclusive health care based on the principle of human rights, be able to motivate, engage and empower the public, be willing to build cross‐sectoral cooperation and be capable of efficiently and effectively managing the health care system. Effective Use of Tax Revenue for Privatization Slowdown Learning from advanced countries on how tax revenue is put to use, it is clear that these countries have redistributed taxes for the highest benefit of the people, thus governments need not go through a rapid large‐scale privatization process on vital sectors such as education and health. Similarly, Indonesia should be able to optimize the use of taxes to improve the quality of its health services and facilities. This paper without question needs to probe further into the issue, principally related to the education and health sector, in addition to delving deeper into the concept of privatization as implemented in Indonesia which has directly led to rising inequalities. Indonesian Women’s Coalition for Justice and Democracy 109
References 1. Permasalahan Pendidikan di Indonesia; Artikel Kumpulan Masalah Pendidikan di Indonesia Kacung Maridjan, University of Airlangga Surabaya, 2012 2. “Investing in Indonesia’s Health: Challenges and Opportunities for Future Public Spending”, World Bank. 2008 3. Mari Bicara Fakta: Catatan Masyarakat Sipil atas Satu Dekade Pelaksanaan MDG’s di Indonesia; Goal 2 Pendidikan Dasar untuk Semua dalam Ancaman Privatisasi Hak Dasar Rakyat 2012, pp. 24‐25 4. Lennart J. Lundqvist, Explaining Privatization: Notes Toward and Predictive Theory, Gothenburg University, Scandinavian Political Studies.htm 1989 5. Paul Starr, “The Meaning of Privatization”, Yale Law and Policy Review 6 (1988): 6‐41. This article also appears in Alfred Kahn and Sheila Kamerman, eds., Privatization and the Welfare State (Princeton University Press, 1989). 6. Daron Acemoglu & James A. Robinson, Mengapa Negara Gagal: Awal Mula Kekuasaan, Kemakmuran, dan Kemiskinan, (Pengantar: Komaruddin Hidayat) 2012, Penerbit PT Alex Media Komputindo 2014 7. “Privatisasi, Program Penyejahteraan atau Penyengsaraan?”, online article www.Pedestrianrhapsody.wordpress 8. “Privatization in Developing Countries: Lesson to Be Learn From The Mozambican Country”, Article Jens Erik Torp & Peter Revke : 1998 9. “Concept And Theory in Political Economy: Article UKessay.com Privatisation and Trans­
nationalisation of Capital”, http://www.ukessays.com/essays/general‐studies/concept‐
and‐theories‐in‐political‐economy.php 10. Anggita Cinditya Mutiara Kesuma, Konsep dan Teori Privatisasi Sebuah Tinjauan Literatur dalam Penulisan Tesis Pengaruh Privatisasi terhadap Efektivitas BUMN, FISIP University of Indonesia, 2009 11. Rencana Aksi Keaksaraan Nasional, 2005‐2009, 2005.1 Sensus Sosial Ekonomi Nasional, BPS, 2003. 110
INFID Analysis ­ No.1 ­ Year 2014 SUPER­TAX ON FRANCE’S MEGA­RICH AND INDONESIA’S 2014 ELECTIONS OVERVIEW 





The French constitutional court recently ruled in favor of a government policy to impose a 75% super‐tax on the mega‐rich (billionaires). This tax bracket far exceeds the average tax rate ceiling in Europe at 43%. Additional tax revenues, and not new loans, are required by the Fench government to stimulate economic growth, and avoid implementing austerity measures which entails the slashing of government expenditure and social spending for its citizens. In Indonesia, the issue of taxation has never been opened for discussion, at least not in both electoral periods between 2004 and 2009. It is now time for tax policies to be contemplated on and become part of the work agenda of legislative and presidential candidates who should have a firm stance on tax policies with viable plans. Indonesia has the potential and obligation to increase tax revenue, from 13–15% to 19–24% within a span of five years. Potential tax revenue can be drawn from Indonesia’s 1,000 billionaires who earn IDR 5–20 billion each year. Another possible avenue is by recovering revenue lost to offshore tax havens to the tune of IDR 100 trillion each year. Indonesia’s tax revenue is currently much lower than the average earnings of other developing countries. Changes in and strengthening of the integrity and anti­corruption stance of the Directorate Generate for Taxation (DGT) are necessary for increasing tax revenue. Improvements to DGT’s performance and accountabilty are an inseparable part of efforts to produce more tax revenue. Tax­revenue increases at 2–5% of Gross Domestic Product (GDP) can be utilized for infrastructure financing, lowering maternal mortality rates, broadening social security, improving the quality of human resources and strengthening the agricultural sector and small‐scale enterprises, improving the administration of public services, in addition to accelerating the creation of an open government, protecting human rights and scaling up anti‐corruption initiatives, such as consolidating the Corruption Eradication Commission (KPK), National Commission on Human Rights (Komnas HAM), National Commission on Violence Against Women (Komnas Perempuan) and National Commission for Child Protection (Komnas Anak). 111
INFID ANALYSIS serves as input for Indonesia’s policy­makers as well as legislative and presidential candidates running for public office who the people will vote for in the 2014 elections. Materials for preparing this analysis are drawn from the media and other reliable sources. Conclusions and recommendations can be tested and are open for debate. The purpose is to present the aspirations and proposals of Indonesia’s civil society groups and citizens who yearn for a viable form of intellectual politics based on programs as well as more inclusive development for all and the protection of human rights. Team of authors: Sugeng Bahagijo, Mickael B Hoelman, J. Prastowo, Setyo Budiantoro and Hamong Santono ** Permission granted to quote or cite provided proper credit is given by mentioning the title of the document and names of authors. 112
SUPER­TAX ON FRANCE’S MEGA­RICH Not every burden must be shouldered by all citizens. In other words, obligations should be borne collectively by all citizens according to their respective capacity, both the haves and the have‐nots, the wealthy and super‐wealthy. This was probably the thoughts of France’s Prime Minister, Francois Hollande. The French constitutional court recently ruled in favor of a government policy that imposes a 75% levy on income earned by the mega‐rich. This tax regime is also known as the “millionaires’ tax”. The policy has shocked the elite and ultra‐rich in France. Some of them are even prepared to change citizenship. In comparison, the average tax rate imposed on the mega‐rich in the rest of Europe is 43 percent. The French constitutional court declared that (a) companies shall pay out 50% tax for executives or employees earning an annual salary of over 1 million euros; (b) the amount of tax payable by companies should not exceed 5% of corporate gross income. This newly introduced tax policy is expected to rake in an estimated 200 million euros in revenue each year for the country’s state budget. It will affect 450 corporations, including a number of high earning football clubs, such as Paris Saint Germain (PSG). Why has France turned aggressive in collecting taxes from its wealthiest? It is common knowledge that amid a lackluster economy, the government needs to act more assertively in stimulating the economy and creating employment opportunities. The socialist government under the leadership of Francois Hollande believes that the government should assume a more decisive and active role rather than simply being on ‘night watch’. The French government shall marshal all resources to attain growth of up to 4.5 percent and reduce deficit by 3% of GDP in the annual budget. The government will also deal with unemployment that has reached 10 percent, the highest rate since the last 16 years, while protecting social security which in the past 10 years has taken a turn for the worse. The next question is where must funding be sourced from? The government typically relies on two sources of revenue – taxes and debt. If debt is considered as an alternative source as normally practiced, this can no longer be the norm given the country’s debt burden that has rocketed to 90% of GDP compared to an average debt of only 50.1% of GDP from the 1980s to 1990s. Taxes are therefore a reliable source to accumulate funds. This is because taxes provide sustainable funding as increases correspond with economic growth and improved government performance. Furthermore, taxes serve as an instrument for the equitable distribution of resources among citizens. The super‐tax is applicable to those earning above 1 million euros annually. In Indonesia, the amount would be equivalent to IDR 16 billion each year. 113
Petitions Signed by the Mega­Rich and Warren Buffet The super‐tax regime is not a policy that came out of nowhere. It was not a hasty decision without its fair share of proponents. Battered by the financial crisis in 2008, most developed countries, and France is no exception, opted for austerity measures, including deep cuts to social security. Prime Minister Hollande however in his electoral campaign promised that the burden of the economic crisis will not solely be laid upon citizens. He preferred to make changes to the country’s tax policy. Previously in 2011, when Prime Minister Sarkozy was in office, a petition was signed by France’s ultra‐rich calling on the government to raise their taxes in order to lift the country out of the financial crisis. The petition signatories were France’s business leaders and prominent figures that include the owner of giant cosmetics company L’Oreal, head of major oil corporation Total SA, head of advertising agency Pubcis Group SA, head of bank Societe Generale and president of Air France KLM SA (Globe and Mail, 13/8/11). This commendable action from the wealthiest individuals in France was not something that they had conjured out of thin air. An earlier initiative made across the Atlantic, in this case the United States, had in fact spurred a similar gesture in France. In the same year, Warren Buffett, a U.S. billionaire had stated in a New York Times op‐ed that the government should impose higher taxes on the ultra‐rich, including himself, to help the government narrow the country’s budget deficit. Buffett also asserted that raised taxes will not dampen the interest of an investor (Stop Coddling the Rich, NYT, 14/8/11). He even suggested that the U.S. Congress immediately impose a minimum tax for the rich (A Minimum Tax for the Wealthy, NYT, 25/11/12). Buffet also wrote that in 2010 he paid over 6 million dollars in taxes. This may seem to be a huge amount but essentially it only accounts for 17 percent of taxable income, far below the amount of taxes paid by employees in his office at rates between 30 and 40 percent. The predominant taxation model worldwide is now shifting towards the schedular system that disaggregates income according to its source generally divided into active and passive income. As a consequence, the tax rate for the financial sector has been too low. Theoretically, a global system is fairer as all income generated is added up before the same rate is applied. This is because income from the financial sector, including shares, derivatives transactions and dividends (company owners and shareholders) is taxed at a low rate, while wages (employees) are subject to higher rates. An investor, shareholder and business owner “instead” brings in substantial money not from his salary but from capital gains, dividends and others. Relevance to Indonesia In Indonesia, a tax policy resembling the above may be worthy of debate and discussion, and become part of the campaign platform of legislative and presidential hopefuls for the 2014 general elections. The issue on tax policy warrants greater attention and should also be a development priority included in Indonesia’s Medium‐Term Development Plan for 2015–2019. There are at least three reasons why presidential and legislative contenders should not wash their hands or remain silent over the tax policy issue: (a) taxes are the dominant and primary 114
source of funds for Indonesia’s national budget compared to foreign debt and grants; (b) Indonesia needs to amass funds to finance its social security schemes, improve infrastructure and agricultural sector that has long been lagging behind; (c) Indonesia needs adequate funds to finance the plans and policies of legislative and presidential candidates. Indonesia’s legislative and presidential aspirants should have answers to the following questions: (i) What is their tax policy and will they focus on tax policy or administration, or both? (ii) What is their strategy for eradicating or minimizing tax evasion or avoidance as reported by KPK (Corruption Eradication Commission) and Global Financial Integrity? What is their strategy in heightening civic participation as dutiful taxpayers and designing a budget structure that provides more guarantee of an equitable and fair redistribution of tax money? Why should legislative and presidential contenders pay urgent attention to taxation? Taxation has become a key policy issue worldwide. An elected president and vice president along with their cabinet ministers will surely not be attending an international forum and session without having a certain stance on tax. Furthermore, efforts to harness enough resources and explore potentials for financing development in order to alleviate the poverty situation are equally important work where much still needs to be done. The High‐Level Panel on the Post‐2015 Development Agenda established by the UN Secretary General in which President Susilo Bambang Yudhoyono serves as a member along with the Prime Minister of the United Kingdom and the President of Liberia has agreed that taxes shall be one of their priorities, specifically in tackling the issue of illicit financial flows and tax havens which both developing and developed countries are not immune to. Indonesia alone has suffered a yearly loss of USD 10 billion or over IDR 100 trillion as a result of these illicit flows. Under G20 in which Indonesia is also a member, world leaders see the need to reform the global taxation system and have included it as part of their agenda. At the behest of G20 leaders, Paris‐based OECD conducted a review which revealed weaknesses and large‐scale abuses resulting in the loss of tax funds through profit shifting and transfer pricing (Addressing Base Erosion and Profits Shifting, OECD, 2012). In an interview with KPMG International Bulletin (2013), an OECD tax official, Saint–Amans, explained on why taxation has turned into an international political agenda and no longer a domestic bureaucratic affair: “Political attention on taxes is growing because it is hard to explain why some profitable companies pay small amounts of tax at a time when taxes on individuals or small and medium‐
sized businesses have increased dramatically almost everywhere. For example, VAT rates have increased in 25 out of 33 OECD countries.” Taxation is a more workable alternative compared to other options because (i) although the debt‐to‐GDP ratio hovers at a low level of below 30% of GDP, it will add to the already existing burden in the form of foreign or domestic debt payment, hence rendering it no longer feasible. The heaviest burden that the country shoulders are its legacy debt. 115
If we examine the burden of servicing domestic and foreign debt, it can come up to a staggering IDR 200 trillion annually as a result of debt entered into during the financial crisis in 1997/1998 for bailing out Indonesian banks to the amount of USD 60 billion. A debt burden threshold which has now reached 2% of GDP has put a strain on Indonesia’s national budget. Aside from loans, another government option is the imposition of (ii) austerity measures. In France, this involves cutbacks in social welfare budget, such as for social security programs. Indonesia however faces a much different situation than France as its social spending remains worryingly low which leaves no room for thriftiness. Budget cuts are in fact more appropriate toward bureaucratic spending (pension funds for politicians, business travel allowance (per diem) for public officials on overseas trips, frequency of business travels and others). Furthermore, the substantial amount of energy or fuel subsidy can be reallocated for other social spending such as social security. At the national level, an effective solution to the tax issue will greatly benefit Indonesia. An improved and fairer taxation system will have the following direct positive impact: (a) a more just tax system can help close Indonesia’s income gap as narrow as possible; (b) if tax‐related corruption can be curtailed, trust will be restored on political parties and the democratic process. Researcher Ahmed Riahi‐Belkaoui (2008) observed a positive correlation between tax compliance with low corruption level and debureaucratization, while Benni Torgler (2007) found how tax compliance is directly proportional to better public services. Once the tax issue is surmounted, the benefits are clear and undeniable, particularly as Indonesia’s national budget will expand up to IDR 200‐400 trillion annually. A massive and unbelievable amount of money for Indonesia. Some may question on how this figure came about? It is a conservative estimate that takes into account the amount of tax money stashed away in overseas tax havens, tax‐related corruption and tax avoidance that have long taken place. The mass media has brought public attention to the tax issue. Alas, this has not spurred meaningful policy changes and improvements. Elections however may create an opportunity for this. Major tax issues include (a) 60 percent of mining corporations do not pay taxes as reported by the head of KPK, Abraham Samad, and tax revenue from the mining sector has experienced a downward trend; (b) Indonesia has suffered losses from tax evasion and avoidance committed by MNCs and national companies to as much as USD 10 billion annually or USD 100 billion in a span of only 3 years as disclosed by a report from U.S.‐based Global Financial Integrity; (c) tax‐related corruption perpetrated by tax officials as divulged by various media, and rampant collusion between taxpayers and tax authorities due to weak oversight; (d) Indonesia’s severe shortage of competent tax officials. The Directorate General for Taxation is estimated to require 13 thousand tax personnel compared to the current availability of 3000 tax officials. Taxation and Presidential Candidate’s Agenda Indonesia’s fate will be highly determined by its tax policy which in turn depends on the direction that elected legislative and presidential candidates will subsequently take. This statement is surely not an exaggeration. 116
Indonesia’s tax revenue remains far from its real potential. As a middle‐income country, Indonesia’s tax receipt should account for an average of 19‐24 percent of GDP. Thus far however Indonesia has stayed at the range of 13‐15 percent. A reason often cited is that the highest tax rate in Indonesia is only 30 percent for annual income above IDR 500 million. This means that the country’s tax regime does not distinguish between the rich who earns IDR 500 million and the ultra‐rich who on an annual basis bring in IDR 3 billion or 10 billion or more. The public and political elite seem to have overlooked Indonesia’s immense potential. By taking unto account Indonesia’s lost income and existing potential, Prastowo and Budiantoro (2012) pointed out that the country has the capacity to earn IDR 500 trillion annually (see Annex 1). IMF projects Indonesia’s potential tax revenue to be 21% of GDP. In the past 10 years, Indonesia through a wide range of privileges and facilities granted to businessmen and corporations has seen the emergence of 100‐200 of the wealthiest individuals as listed by Globe and Forbes magazine. They are dubbed the mega‐rich or high net worth individuals because they earn in excess of 10 billion. They qualify to make the list of the richest people thanks to their money‐minting businesses in coal mining, oil palm plantation and property and trade in the past 10 years (see Annex, Indonesia’s 150 Richest List). The list however is on the conservative side as it excludes executives and the top brass of state‐
owned enterprises. Data released by Indonesia Corruption Watch (ICW) showed that there are 147 state‐owned companies, one of which is BRI, that have paid monthly salaries and bonuses of up to 600 million or 8 billion yearly in 2009 alone. From ICW’s data it can be inferred that there are still an additional 140 over high earners in Indonesia who are not included in the list. (ICW, http://www.antikorupsi.org/ id/content/gaji–bos–bos–bumn–tertinggi –rp–167–million–
bulan). Indonesia also has not adopted a fairer burden‐sharing mechanism of development. It is now time for the mega‐rich to contribute more, and the government needs to set a much higher share of the burden to at least 40‐45 percent as instituted in European countries. A policy change requires modifications to the tax rate. The tax rate for the mega‐wealthy should be different from the burden borne by the rich. The income range should immediately be determined between the rich and super‐rich. It could be between IDR 1 billion and IDR 3 or 5 billion annually, or between IDR 1 billion and above IDR 10 billion yearly. The 30% rate can still be applicable for a maximum income of IDR 1 billion annually, while a 40% or 45% rate is imposed on those reaping over IDR 5 billion on an annual basis of which the target is 250‐350 of Indonesia’s wealthiest. This includes executives, top management, owners and shareholders of companies in the following sectors (i) mining; (ii) banking; (iii) telecommunications; (iv) large‐scale plantation; (v) large‐scale trading and manufacturing (automotive); and (vi) capital and financial market. This policy should be complemented with an upper limit on corporate tax payment to be not more than 5 percent of corporate gross income. This complementary policy is required given widespread attempts to shift individual income tax as part of corporate expenses. These practices are committed either legally (tax avoidance) or illegally (tax evasion) in order to minimize the amount of tax payable. 117
Other recommended tax policy changes have also been proposed, both institutionally and pertaining to accountability and integrity, primarily changes that directly impact on Indonesia’s tax performance. Recommendations for improving DGT performance include (i) separating DGT from the Ministry of Finance to ensure that its performance and accountability can be more easily measured and supervised; (ii) recruit additional tax auditors and personnel in a view to meet expected targets and performance level; (iii) optimize the role of the tax ombudsman to guarantee DGT’s integrity; (iv) the enforcement of Article 35A, Law on General Provisions of Taxation is imperative as it makes it mandatory for institutions, associations and relevant parties to disclose tax data or information to the Directorate General of Taxation. The following provides a summary of key targets of tax policy options: Tax revenue target for the next five years (tax ratio) Tax revenue nominal target POLICY MEASURES Tax policy Increase from 13–15% to 18–20% of GDP
Total national budget targeted to increase from 18–19% to 23–25% of GDP annually 200 to 400 T annually
DGT as an institution
DGT accountability =>DGT is separated from =>Optimize the role of the =>Change in tax rate from the Ministry of Finance; tax ombudsman by 30% to 45% for the highest reports directly to the broadening its powers. earners (ultra‐rich); income president, but functionally above 10 billion annually coordinates with the Finance Ministry =>Establish a new special =>Improve selection =>Change in tax rate from unit/office on MNCs and method of DGT personnel 30% to 37.5% for the second by adopting the KPK highest earners (rich): income the ultra‐rich (task force and services to curtail illicit selection process to recruit of 1 – 10 billion annually flows, supervised by KPK) potential DGT staff of unquestionable integrity =>DGT transparency, =>Impose upper limit on tax =>Ensure all mining including the publication of payment by companies that corporations pay their taxes its annual performance must not exceed 5 percent of report according to sectoral corporate gross income and regional revenue => Ensure all plantation =>DGT openness, disclose =>Recover 100 trillion from and automotive companies information on the wealth of unpaid taxes placed in pay their taxes DGT directors and other offshore tax havens (illicit high‐ranking officials flows) => National Data Integration => Accelerate the under the Directorate General establishment of an for Taxation as part of efforts integrated 118
to implement Article 35A, Law on General Provisions on Taxation that is binding for all government bodies and relevant associations administration system that unites all corridors/portals of state ministries/agencies and special task forces of KPK, BI, OJK. PPATK, police force and attorney general’s office to curtail illicit flows If presidential and legislative hopefuls were to include tax policy change as part of their agenda, there is still hope for Indonesia to increase its tax revenue, either from greater tax revenue potential or more effective tax collection. In the next 5 years, Indonesia will secure additional funds at 3‐5 percent of GDP. In nominal terms, Indonesia will gain an additional IDR 300‐400 trillion each year. The sheer amount of additional funds will allow Indonesia to step up social investment and development. Such substantial amount of tax money is vital for implementing numerous development agendas previously shelved or neglected due to financial shortages. First, social spending including for social security (national health insurance program, family welfare program), scholarships and subsidies for medical school and additional educators. A pressing issue is to lower the maternal mortality rate and this requires adequate social investments to improve health facilities and infrastructure that include dealing with a shortage of medical practitioners, midwives and nurses in regions across Indonesia. Medical, midwifery and nursing schools need the full support of the government to enhance Indonesia’s preparedness in implementing its national health insurance program (JKN) throughout Indonesia. Second, infrastructure spending (clean water, energy, roads, railway) and urban management in cities across Indonesia. The government needs to play a more assertive role in providing energy in order to bring down energy costs that have soared over time. The government for example must make available adequate financial support to deliver more affordable energy to consumers and reduce Indonesia’s reliance on imports. Third, government spending for strengthening the agricultural sector and small to medium‐
scale enterprises. The agricultural and animal husbandry sector needs to be reformed to lessen Indonesia’s dependence on imported goods in order to meet domestic supply for basic commodities and food. The government’s role in securing the necessary financing is therefore of utmost importance. Fourth, strengthening anti‐corruption and human rights policies and institutions. To tackle widespread corruption, Indonesia requires competent human resources and sound 119
institutions. KPK needs to be strengthened to allow it to reach all regions throughout Indonesia. Civil society engagement is equally crucial to prevent corruption, as demonstrated by ICW, Fitra and other NGOs. Human rights violations with regard to economic, social and cultural rights, as well as civil and political rights, have become increasingly prevalent yet effective solutions remain elusive. This has seriously undermined the spirit of mutual help and social cohesion in Indonesia. The National Commission for Human Rights (Komnas HAM), National Commission for Violence Against Women (Komnas Perempuan) and National Commission for Child Protection (Komnas Anak) therefore must be given full support, both in terms of funding and infrastructure. Government support can be channeled to various NGOs working towards strengthening the voice of women, as well as the poor, disabled and vulnerable. Development spending that urgently requires additional financing is as follows: Type of Spending 1.
Infrastructure improvements and expansion, primarily for energy, clean water, road and railway, and urban management (floods, transportation and solid waste) 2.
Social protection: social security and basic income guarantee, and strengthening Indonesia’s human resources: improving health and educational services 3.
Strengthening the agricultural sector and small industries 4.
Strengthening anti‐corruption institutions and restoring the fundamental rights of victims of rights abuses (land, environment, property and others) Funding estimate IDR 200–400 T IDR 100–200 T IDR 50–100 T IDR 25–50 T 120
How then is the prospect for implementing tax policies? This is where the challenge lies for Indonesia. By including taxation as part of the discussion agenda to ultimately be adopted as the presidential candidate’s program and agenda, the issue on taxation is expected to be effectively dealt with. It has sadly been left to become a chronic and acute problem as it has never been raised as a priority agenda during elections. Another issue lies with Indonesia’s power elite who either consciously or not have for years imposed a heavier burden on the common people or the working class than the more well‐heeled, shareholders and company owners. Presidential and legislative candidates should also adopt a firm stance, capable of refusing tax policies dictated by those who pander to the interests of the mega‐rich. The list of Indonesia’s wealthiest people consists of familiar faces as they are either close to or relatives of high‐profile politicians. They carry a formidable clout that presidential and legislative hopefuls find hard to say no to. In dealing with the influence and lobbying of the ultra‐rich perceived as unpatriotic, these candidates shall be tested on the consistency of their political agenda. On the other hand, the public clings on to the hope of an Indonesia where the patriotism of the super‐rich is no longer doubted, as demonstrated by Warren Buffet in the United States or the group of French billionaires who empathize with the people. Buffett and his fellow ultra‐rich friends have urged their government to impose a much lofty tax rate compared to the workers. They understand that a harsher rate will not be an obstruction to reap profits. They therefore will consistently support the government in finding a feasible way out of development budget issues. Billionaires like these can feel for the sufferings of others, and willing to shoulder a fairer share of the burden according to their capacity. 121
Annex 1: Tax Reviews on Indonesia AUTHOR/INSTITUTION Prakarsa (2013) http://theprakarsa.org/ne
w/in/news/detail/300/PR
ESS–RELEASE–Evaluasi–
Realisasi–Penerimaan–
Pajak–2013–Tidak–
Memenuhi–Target–
Terendah–Sejak–2011 Tony Prasetiantono (UGM) http://www.pajak.go.id/co
ntent/tony–prasetiantono–
indonesia–harus–
tingkatkan–tax–ratio Wiyoso Hadi (DJP) http://www.pajak.go.id/co
ntent/article/berapa–sih–
sebenarnya–tax–ratio–
indonesia YEAR 2013 KEY FINDING/RECOMMENDATION  Tax revenue falls short of 2013 target  Tax evasion and avoidance, and tax‐related corruption contribute to low‐level tax revenue  5 sectors vulnerable to tax evasion and avoidance 2013 
Indonesia’ tax revenue should ideally account for 20% of GDP or at least 17% of GDP 2012 
Discussions on the scope of tax ratio: (i) national tax revenue, (ii) regional tax revenue; and (iii) national resources revenue If tax ratio only consists of national tax revenue, tax ratio will only be 11.76% of GDP (2011) If it includes both national and regional tax revenue, tax ratio will be 12.56% (2011) If all three revenue components are included – national and regional tax revenue and natural resources revenue, Indonesia’s tax ratio will reach 15% (2011) Indonesia’s tax revenue is lower than poor and rich countries Potential tax receipts are more than IDR 500 trillion Tax revenue ratio needs to increase 1% each year to be at the same level as other middle‐
income country Tax rates should be revised for the super‐rich (high net worth) to 40% Indonesia’s tax revenue is the lowest among countries in the same region and among G20 


Prastowo J and Budiantoro S. (2012) Low Tax Ratio, Piling Up Debt http://theprakarsa.org/ne
w/ck_uploads/files/Prakar
sa%20Policy_Maret_10.pdf 2012 



Arnold, J. (2012), “Improving the Tax System 2012 
122
in Indonesia”, OECD Economics Department Working Papers, No. 998, 


IMF (2011a), “Revenue Mobilization in Developing Countries”, 2011 
member states
Tax ratio reached only 12.6% of GDP in 2011 Personal income tax collection is too low compared to other ASEAN and OECD member countries Indonesia needs to reform its tax administration system IMF’s estimate of Indonesia’s potential tax revenue is 21% of GDP 123
Annex 2: Indonesia’s 150 richest list according to Globe Asia (2013): 1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
Robert Hartono & Michael Hartono, Djarum, USD 15.5 billion Eka Tjipta Widjaja, Sinar Mas, USD 13.1 billion Anthoni Salim, First Pacific, USD 10.1 billion Susilo Wonowidjojo, Gudang Garam, USD 6 billion Martua Sitorus, Wilmar International, USD 3.7 billion Aburizal Bakrie, Bakrie Group, USD 2.45 miiyar Putera Sampoerna, Sampoerna Strategic, USD 2.4 billion Peter Sondakh, Rajawali Group, USD 2.53 billion Mochtar Riady, Lippo Group, USD 2.15 billion Sukanto Tanoto, Royal Golden Eagle, USD 2.1 billion Sri Prakash Lohia, Indorama, USD 2.05 billion Chairul Tanjung, CT Corp, USD 2.05 billion T.P. Rachmat, Triputra & Adaro, USD 2 billion William Katuari, Wings Group, USD 1.8 billion Low Tuck Kwong, Bayan Resources, USD 1.7 billion Edwin Soeryadjaja, Saratoga, USD 1.7 billion Hary Tanoesoedibjo, MNC Group, USD 1.7 billion Tahir, Mayapada Group, USD 1.6 billion Sjamsul Nursalim, Gajah Tunggal Group, USD 1.6 billion Djoko Susanto, Sumber Alfaria Trijaya, USD 1.4 billion Suryadi Darmadi, Duta Palma Nusantara Group, USD 1.4 billion The Nin King, Manunggal Group, USD 1.38 billion Ciputra, Ciputra Group, USD 1.375 billion Kartini Muljadi & Handojo Slamet Muljadi, Tempo Group, USD 1.37 billion Trihatma K. Haliman, Agung Podomoro Group, USD 1.3 billion Jakob Oetama, Kompas–Gramedia Group, USD 1.3 billion Mu’min Ali Gunawan, Panin Group, USD 1.26 billion Boenjamin Setiawan, Kalbe Farma, USD 1.2 billion Teddy Thohir & Garibaldi Thohir, TNT Group, USD 1.2 billion Benjamin Jiaravanon, Charoen Pokphand Indonesia, USD 1.2 billion Hartadi & Husodo Angkosubroto, Gunung Sewu Group, USD 1.2 billion Prajogo Pangestu, Barito Pacific Group, USD 1.15 billion Kiki Barki, Harum Energy Group, USD 1.1 billion Murdaya Poo & Siti Hartati Murdaya, Central Cipta Murdaya, USD 1.1 billion Eddy Sariaatmadja & Fofo Sariaatmadja, SCTV, USD 1.1 billion Aksa Mahmud, Bosowa, USD 1.1 billion Hashim Djojohadikusumo, Arsari Group, USD 1.05 billion Martias & Tjiliandra Fangiano, First Resources, USD 1.05 billion Haryanto Adikoesoemo, AKR Corporindo, USD 1.05 billion 124
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
A.H.K. Hamami, ABM Investment, USD 1 billion Benny Subianto, Persada Capital Group, USD 995 million Lim Hariyanto Wijaya Sarwono, Harita Group, USD 990 million Soetjipto Nagaria, Summarecon, USD 925 million Rusdi Kirana, Lion Air Group, USD 920 million Sandiaga Uno, Saratoga & Recapital, USD 900 million Husein Djojonegoro, ABC & Orang Tua Group, USD 880 million Sugianto Kusuma, Agung Sedayu & Bank Artha Graha, USD 860 million Tomy Winata, Artha Graha Group, USD 820 million Luntungan Honoris, Modern Group, USD 805 million Alexander Tedja, Pakuwon Group, USD 765 million Kuncoro Wibowo, Ace Hardware, USD 728 million H.M. Lukminto, Sritex Group, USD 720 million Samin Tan, Borneo Lumbung Energy and Metal, USD 710 million Gunawan Jusuf, Sugar Group Companies, USD 710 million Osbert Lyman, Lyman Group, USD 695 million Johan Lensa, J Resources, USD 670 million Agus Sudwikatmono, Indika Energy, USD 665 million Handojo Santoso, Japfa Comfeed, USD 665 million Tan Siong Kie, Rodamas Group, USD 650 million Purnomo Prawiro, Blue Bird Group, USD 650 million Jan Darmadi, Jan Darmadi Group, USD 642 million Wiwoho B. Tjokronegoro, Indika Energy, USD 635 million Eka Tjandranegara, Mulia Group, USD 635 million George Tahija & Sjakon Tahija, Austindo Nusantara Jaya, USD 585 million Paulus Tumewu, Ramayana Group, USD 575 million Bachtiar Karim, Musim Mas, USD 575 million Rudolph Merukh & Lucky Merukh, Merukh Enterprises, USD 565 million Hendro Gondokusumo, Intiland, USD 555 million Hutomo Mandala Putra, Humpuss, USD 550 million Jusuf Kalla, Kalla Group, USD 550 million Amirsjah Risjad, Risjadson Group, USD 520 million Harjo Sutanto, Wings Group, USD 515 million Surjadinata Sumantri, Renaissance Capital, USD 510 million Arifin Panigoro & Hilmi Panigoro, Medco International, USD 510 million John Chuang, Ceres Indonesia & Petra Food, USD 505 million Subianto Tjandra, Ateja Group, USD 500 million Adyansyah Masrin & Jimmy Masrin, Lautan Luas Group, USD 495 million Tan Kian, Dua Mutiara, USD 490 million Sudhamek, Garuda Food, USD 475 million Sofjan Wanandi, Gemala Santini, USD 470 million Ginawan Tjondro, CNI Group, USD 465 million 125
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
121.
122.
123.
Henry Pribadi, Napan Group, USD 445 million Soegiharto Sosrodjoyo, Sosro Group, USD 445 million K. Gowindasamy, Mitra Jaya Group, USD 440 million Alim Markus, Maspion Group, USD 438 million Sutanto Djuhar, First Pacific, USD 420 million Iwan Budi Brasali & Aldo Brasali, Brasali Group, USD 420 million Mohammad Reza, Global Energy Resources, USD 415 million Rosan Roeslani, Recapital, USD 400 million Yos Sutomo, Sumber Mas, USD 390 million Surya Dharma Paloh, Media Group, USD 387 million Hendro Setiawan, Pikko Group, USD 380 million Dahlan Iskan, Jawa Pos Group, USD 370 million Sukamdani Sahid & Gitosardjono, Sahid Group, USD 367 million Jahja Santoso, Sanbe Farma, USD 360 million Dick Galael, Fast Food Indonesia, USD 350 million Muljadi Budiman, Honda Prospect Motor, USD 345 million Djoenaedi Joesoef, Konimex, USD 340 million Rudy Suliawan, Karang Mas Sejahtera, USD 335 million Oesman Sapta Odang, OSO Group, USD 330 million Kris Taenar Wiluan, Citra Mas Group, USD 325 million Didi Dawis, Ling Brothers, USD 320 million Tatang Hermawan, Fuju Palapa Textiles, USD 315 million Boyke Gozali, Mitra Adi Perkasa, USD 315 million Sugiono W. Sugialam, Trikomsel, USD 300 million Winarko Sulistyo, Fajar Surya Wisesa, USD 290 million Johny Widjaja, Sintesa Group, USD 290 million Benny Suherman, Studio 21 Group, USD 285 million Henry Onggo, Ratu Sayang Group, USD 270 million Mardjoeki Atmadiredja, Surya Toto Indonesia, USD 270 million Chandra Lie, Sriwijaya Air, USD 265 million Kaharudin Ongko, Ongko Group, USD 260 million Anton Setiawan, Tunas Group,USD 257 million Siswono Yudohusodo, Bangun Cipta Sarana, USD 255 million Pontjo Sutowo, Nugra Sentana Group, USD 245 million Karmaka Surjaudaja, OCBC, USD 240 million Johanes B. Kotjo, Apac Group, USD 240 million Sendi Bingei, Sumatra Tobacco Trading, USD 235 million Elizabeth Sindoro, Paramount Group, USD 235 million Tan Tjai Kie, Gunung Garuda Steel, USD 230 million Sri Sultan Hamengkubuwono X, USD 225 million Ilham Habibie & Thareq Habibie, Ilthabi Rekatama, USD 225 million Bambang Trihatmodjo, Asriland, USD 220 million 126
124.
125.
126.
127.
128.
129.
130.
131.
132.
133.
134.
135.
136.
137.
138.
139.
140.
141.
142.
143.
144.
145.
146.
147.
148.
149.
150.
Rachmat Gobel, Gobel International, USD 208 million Stanley S. Atmadja, Asco Automotive, USD 205 million Widarto, Sungai Budi Group, USD 205 million G.S. Margono, Gapura Prima, USD 205 million Tandean Rustandy, Arwana Citramulia, USD 202 million G. Lukman Pudjiadi, Jayakarta Group, USD 200 million Budi Purnomo Hadisurjo, Optik Melawai, USD 185 million Iskandar Widyadi, Bank Jasa Jakarta, USD 185 million Anna B. Manthovani, Kirana Tanker, USD 170 million Honggo Wendratno, Arsari Pratama, USD 155 million A. Tong, Roda Vivatex, USD 150 million Siti Hardijanti Rukmana, Citra Lamtoro Gung Persada, USD 150 million Sugianto, Metro Garmin Group, USD 145 million Rudy Unjoto, Deliatex Kusuma, USD 130 million Batihalim Stefanus, Nojorono Tobacco, USD 125 million Mintarjo Halim, Sandratex, USD 120 million Soedjono, Wira Sakti Adimulya, USD 117 million Setiawan Djody, Setdco Group, USD 117 million Fajar Suhendra, Sumatra Growth Group, USD 115 million Bambang Setijo, Pan Brothers, USD 110 million Jacobus Busono, Pura Group, USD 105 million Raam Punjabi, Multivision Plus, USD 101 million A. Siang Rusli, Kurnia Tetap Mulia, USD 99 million Marimutu Maniwanen, Busana Apparel Group, USD 98 million Ishak Charlie, Kurnia Tetap Mulia, USD 97 million Boedi Mranata, Adipurna Mranata Jaya, USD 96 million Tjandra Mindarta Gozali, Gozco Group, USD 93 million 127
No.2‐Year 2014 MAYOR OF NEW YORK CITY, INEQUALITY AND 2014 ELECTIONS SUMMARY

After twenty years of being under the grip of the pro-business Republican administration, the winds of change are
now wafting through the city of New York. A city that once lived up to the creed “Greed is Good” is now under the
leadership of a new mayor, Bill de Blasio whose key program is to tackle inequality.

Concern over the issue of inequality has garnered worldwide attention, a situation much different 5-10 years ago.
Not only has it caught the attention of activists and academicians but also religious leaders such as Pope Francis,
business groups including World Economic Forum and IMF, UNDP and UNICEF, as well as President Obama in his
second term of office.

Inequality in Indonesia has worsened in the past 10 years. The country’s presidential and legislative candidates need
to take a stance and devise a plan to deal with inequality. Economic growth and a free market mechanism in
Indonesia in the last 10 years has failed to narrow inequality, and instead aggravated the situation. The government
plays a critical role. It can implement 3 concurrent actions: policy change, institutional reform and accountability.

Despite democratic elections held twice in Indonesia in 2004 and 2009, the issue of inequality has never been
discussed and debated by presidential and legislative hopefuls when in fact its implications are real and concrete,
affecting many.

Options available to presidential and legislative candidates in dealing with inequality are as follows:
(a) Narrowing inequality should be included as a development indicator in the next five-year medium-term
development plan (RPJM), in addition to poverty and unemployment reduction: lowering the Gini index from 0.41 to
0.35 within the next five years;
(b) Improve policies and increase tax revenue by 19%-24% of GDP, particularly derived from income tax levied on
the super-rich at a new tax rate of up to 45% to ensure greater contribution from the ultra-wealthy;
(c) Reallocate fuel subsidy to provide universal social security, such as through the national health insurance scheme
(JKN) and worker’s insurance available to all citizens;
(d) Strengthen the powers and resources of government agencies: Corruption Eradication Commission (KPK),
Director General of Taxes, National Land Agency, Ministry of Manpower, Ministry of Agriculture, Central Bureau of
Statistics (BPS) and Presidential Working Unit for Development Oversight and Control (UKP4).
INFID ANALYSIS serves as input for Indonesia’s policy­makers as well as presidential and legislative candidates running for public office who the people will be voting for in the 2014 elections. Materials for preparing this analysis are drawn from the media and other reliable sources. Conclusions and recommendations can be tested and are open for debate. The purpose is to present the aspirations and proposals of Indonesia’s civil society groups and citizens who yearn for a viable form of intellectual politics based on programs as well as more inclusive development for all and the protection of human rights. 128
INFID ANALYSIS serves as input for Indonesia’s policy­makers as well as legislative and presidential candidates running for authorNEW YORK, NEW YORK Apart from being the location for the United Nations (UN) main headquarters, New York dubbed a city that never sleeps is also regarded as the financial capital of the world. Not surprisingly, Wall Street has become its foremost icon. Gordon Gekko, a character in the film Wall Street (1987), portrayed by actor Michael Douglas is famed for his “greed is good” ideology. New York however may soon project a different image. All is possible, even for New York to change. Since 2014, the city has been under the leadership of a new mayor. This is indeed a profound political shift, particularly as in the past twenty years, New York has been managed by pro‐business Republican leaders, Rudy Guilani and Michael Bloomberg. New York henceforth will be led by its new mayor, Democrat Bill de Blasio, 52, who will be the 109th mayor. One of its main agendas is to tackle inequality in New York. He will be serving for four years and may be re‐elected for another two terms of office. Being at the helm of New York is not an easy task to undertake. Some even regard the position of New York Mayor as the second toughest job after the U.S. President. With a population of over eight million and 350 thousand workers, New York and the New York Mayor has become the U.S. political barometer. President Franklin Delano Roosevelt known for his New Deal policy and a central figure to the Allied victory in World War II was a New York mayor before elected U.S. president for four terms. Bill de Blasio as the mayor‐elect vows to deal with the never‐ending Dickensian tale of the rich and poor that has long characterized New York. Changes will be made to ensure that “the people of New York will no longer feel that only 1% of the population owns the city, but a place where every citizen can work, live and build families”. One of these changes is to increase taxes to be reallocated for improving the quality of life of the less fortunate. A higher tax rate will be imposed for the well‐heeled, those earning USD 500 thousand to 1 million annually. Collected taxes will be redistributed for advancing early childhood education (pre‐kindergarten). Why the issue of inequality? Isn’t the U.S. a superpower, prosperous and advanced nation? Data and statistics however tell a different story. The world’s billionaires and super‐rich seem to converge in New York and U.S., yet a quarter of the population, the lowest income earners have not seen a rise in income in the past 25 years. On the other hand, the earnings of the wealthiest 1% have leapt threefold, capturing 20% of national net worth. Technological advancements and globalization (industrial relocation in search of cheap labor and location) have contributed to rising inequality. In 1979, General Motors automotive manufacturing 129
facility employed a total of 850 workers. Microsoft today retains 100 thousand employees across the globe. Google has 50 thousand workers while Facebook hires 5 thousand employees. The film Capitalism: A Love Story (2009) by Michael Moore among others depicts how the automotive assembly plant that his father worked in was relocated. Source: Economic Policy Institute, The State of Working America 2011, "Wealth Holdings Remain Unequal in Good and Bad Times." Among developed countries, the U.S. has one of the highest inequality levels. The inequality map among rich nations reveals two key trends: (a) high inequality, and (b) low inequality. The highest inequality is found in the U.K., U.S., Portugal and Singapore, while the lowest is recorded in Sweden, Japan and Norway (www.equalitytrust.org.uk). The figure below shows the U.S. positioned among other rich countries but with high inequality index. The U.S. lies in the upper right quadrant, whereas prosperous countries clustered in the lower right quadrant are high‐income earners but with low inequality index. Indonesia is placed in the upper left quadrant which represents low‐income, high‐inequality countries. 130
S
Source: CIA World Factt Book O
Obama and
d World Eco
onomic Forrum The New Yo
T
ork City Maayor is not the only on
ne agonizin
ng over the issue of in
nequality. Earlier E
in D
December 2
2013, Presid
dent Obamaa in his speeech has decclared inequ
uality as a ““defining ch
hallenge” t
that he will focus his atttention on. Obama laid out evidencce on why iinequality iss a crucial issue: “The ttop 10 perccent no longger takes O
in one‐third
d of our inco
ome; it now takes half. Whereas in
n the past, th
he average CEO made aabout 20 t
to 30 times (comparatiive) the inccome of the average worker, today’s CEO now
w makes 27
73 times m
more. And m
meanwhile, a family fro
om the top 1
1% has a neet worth 288 times higher than the typical f
family in the
e U.S.” This show of T
o concern does not stop at politticians. A global busin
ness group represented
d by the W
World Econ
nomic Forum
m last year mentioned
d severe inccome disparrity as one of the majo
or global r
risks (Globa
al Risk 2013). It is un
nderstandab
ble if WEF is troubled
d over the convergingg of two w
weighty issues: sluggissh economy
y and incom
me inequallity which may m instigaate social fllare‐ups. W
World lead
ders from all a ranks, including the t
businesss commun
nity and government,, should t
therefore be
e made awaare of this w
worrying tren
nd. [Global R
Risk, 2014]
A group of world expeerts and leaaders estab
A
blished by the t UN Secrretary Geneeral, the Higgh Level P
Panel on Post‐2015 Developmen
D
nt Agenda (HLPEP), in
n its reporrt “A New Global Parttnership: 131
Eradicate Poverty and Transform Economies through Sustainable Development” mentions inequality as a critical issue. Many parties have even urged to include inequality in the priority list of the post‐2015 development agenda, following the expiry of MDGs by 2015. This concern over the issue of inequality is not only voiced by activists and the academia, but also religious leaders such as Pope Francis who in the “Evangelii Gaudium” document (2013) called for a worldwide response to inequality. In the 50,000‐word document, Pope Francis strongly criticized the free market mechanism that has instigated economic disparities and its failure to stimulate a trickle –down effect. (Washington Post, 11/27/13) On the other hand, the world is also inundated with news and analysis on the rise of a new economic block expected to replace advanced countries (G7), touted as the world’s economic engine: countries under BRICS also known as the emerging economies. However, at the same time inequality has worsened in nearly all countries with the exception of Brazil that has managed to significantly narrow its economic inequality. OECD has mapped out this phenomenon, including the reasons for the escalation of income inequality in Argentina, Brazil and Indonesia. Oxfam and the Brazil‐based BRICSAM research institute have conducted a mapping of the inequality situation in BRICSAM countries. In Indonesia, a similar study was done by Arief Anshory from Padjajaran University (see Annexes 2 and 3). The Spirit Level: Why More Equal Societies Almost Always Do Better, a best‐selling book published in 2009 with 150,000 copies sold will soon be translated into 23 languages. Authored by Kate Pickett and Richard Wilkinson, the book sheds light on the adverse social consequences of inequality such as diminishing trust towards others, heightening sense of exclusion and more widespread diseases, and triggering excessive consumptive behavior. Eminent economist Joseph Stieglitz, a former World Bank Chief Economist, in 2012 authored The Price of Inequality, reiterating that 1% of U.S. highest earners are in control of 40% of national wealth. Stieglitz also asserts that rising inequality in the U.S. has stripped the country of its image as the land of hope, putting the lives and livelihoods of future generations at grave risk. In many countries, community‐based groups have paid more attention to studying the issue of inequality to effectively deal with it. In the U.K., Equality Trust is an institution that has prepared a course of action for the younger generation to contribute in lessening inequality. In Europe, Luxembourg Income Study has prepared cross‐national databases for policy reviews and formulation. Another institution, Inequality Watch, studies and monitors issues related to inequality (www.inequalitywatch.eu). In the U.S., Robert Reich, Secretary of Labor, produced the film “Inequality for All” to raise public attention on the urgency of the U.S. inequality situation. It is somewhat similar to the film produced by Al Gore, but focuses more on inequality. 132
An interesting initiative is the “Wealth for the Common Good” under the Institute for Policy Studies – IPS that has organized “the 1% for an economy that works for everyone” campaign, bringing together a network of members representing the wealthiest 2% who will call upon (through letters, petitions and dialogues with congress, etc.) other ultra‐rich Americans to join in the action and push for fairer tax policies. Members of this noble group include Warren Buffet, the richest man in the United States. (www.inequality.org). Inequality in Indonesia Indonesia’s situation can somewhat be liken to Charles Dickens’ Tale of Two Cities. However, Indonesian poet WS Rendra has aptly described Indonesia in the following poem: A heap of corn lying in the room/and a young man who graduated from high school/Penniless /without the means to become a college student/only a heap of corn He sees himself ambling aimlessly/he sees himself thrown out of a discotheque/he notices a pair of smart shoes behind the display window/he spots his rival riding a motorcycle/he looks at some lottery numbers/He sees himself alone, destitute and a failure (A Heap of Corn, a poem from “Potret Pembangunan Dalam Puisi” [Development in Poetry], 2008, Burung Merak Press) Both fragments of the poem were written in the 1970s, reflecting the poet’s distress over the situation at the time. It was the decade when the Malari 1974 and student movement of 1978 took place as university students and the opposition made attempts to rectify development policies. The foregoing poem is still relevant in many of today’s realities; from fancy cars confiscated by KPK to opulent mansions advertised on television. Some succeed in pursuing higher education, while others are outsourced to work in factories or as migrant workers in Malaysia. Some are jobholders, and many remain jobless, and there are those living in upscale Pondok Indah and more modest housing in Pondok Gede. The ultra‐rich in Indonesia have reached their privileged status by drawing from the country’s economic resources and commodities, such as oil palm, coal and other minerals, multimedia and communication technology, and finance (see Annex 5). On the other extreme, the rest of Indonesia has not been able to escape poverty and destitution. Not surprisingly, in line with positive economic growth in the past 10 years, income inequality has instead worsened from 0.33 to 0.41. Inequality‐related data compiled by development economists from Padjajaran University (www.keberpihakan.org) reveals the following: (i) In 2012, Jakarta’s Gini coefficient (inequality benchmark) registered at 0.42; (ii) In 2012, the richest 20% enjoy 49% of national income, (increased from 40% in 2002). Meanwhile, the poorest 40% only holds 16% of national income 133
(shrunk from 20% in 2002). (iii) the wealthiest 10% experiences a twelvefold surge in income compared to the bottom 10% (increased from 9.6 times in 2007). Jakarta is not the only city blighted with chronic inequality. Bandung is similarly afflicted with a rapid rise in inequality. With a robust economic growth (9% annually), Bandung instead has seen a concomitant increase in inequality. This among others is evident when economic progress is compared to consumption growth. If the rise in income as a consequence of economic growth is inequitably distributed, enjoyed only by a handful, the average household consumption spending will also tend to increase at a slower pace. This is because the rich and super‐rich are inclined to set aside additional income as savings rather than for consumption. As a consequence, income will increase at a faster rate than consumption growth. This has been adequately proven. SUSENAS (National Socio‐Economic Survey) data showed growing income inequality in Bandung from 2007 to 2012, among the highest in Indonesia. In 2007, Bandung’s Gini index (standard income inequality benchmark) was 0.37 and rose to 0.47 in 2012. This is much higher than the national average of 0.41 (Arief Anshory Yusuf, Pikiran Rakyat, 8 January 2014). Fixing inequality is of utmost urgency given the following realities: (i) Indonesia has the highest maternal mortality rate in ASEAN, and also among middle‐income countries, yet it has managed to carve a much larger slice of the economic pie compared to Malaysia, Singapore and Thailand; (ii) poor quality of Indonesia’s human capital in terms of the average educational attainment of the workforce, most of whom have only graduated from primary or lower secondary school, whereas economic and labor market competition, specifically for good‐paying jobs in Indonesia or abroad, driven by the free market mechanism will only be advantageous for those with impressive educational credentials, the highly skilled and of good health. Inequality can be seen from three angles. By using the Gini index and examining the ratio between different income levels, and also through the Palma index (see Annex 1). Inequality can also be measured from the varying levels of social and economic opportunities available to different layers or groups of society, between men and women (see Annex 2). Inequality in relation to poverty, even though both differ from each other. Preventing inequality and poverty requires different strategies and programs (see Annex 5). Symptoms of INEQUALITY in Indonesia Symptom Status  Lowest wage/salary compared Highest minimum wage (DKI): IDR 2.5 million vs. the salary of directors of public banks at IDR 250 million. to the highest Gap: 200 times over At least 50‐75 million people are not covered by health  Health care insurance At least 2 million housing units required to meet housing  Housing needs 134



Educational services Clean water and sanitation Pension funds 
Quality of workforce 12 million children have dropped out of school 100 million people with no access
Only 10% is covered by a pension plan, specifically those born in the 1960s 65% have only finished their primary or lower secondary education A multitude of factors contribute to growing inequality. First, the negligible role of taxation and fiscal policies in improving income levels (labor market income). This is unlike the situation for advanced countries where their taxation and transfer systems significantly affect income (social security, household benefits, education subsidy, etc.). Second, weak government role in mediating the interests of business entities and workers. This is evident in the following aspects: (a) privileges and deferment of the minimum wage policy; (b) allowing outsourcing practices that adversely affect workers; (c) absence of an unemployment benefit scheme. On the other hand, (d) the government does not put a salary and benefits cap for CEOs and high‐ranking officers in the finance and banking sector, both in private and public companies. Third, women in Indonesia are under‐represented at only 18%, far below the 30% national target. In many countries where women are adequately represented in politics, social spending and public service delivery has been more than satisfactory. This is evident in Scandinavian countries. Fourth, government has been ineffective in setting proper quality standards and targets for public services, including access to basic services such as drinking water, health care and education. In the era of regional autonomy in the past 15 years, the government has not set a minimum limit on public services (to protect). On the other hand, the government has not imposed a ceiling on bureaucratic and political spending in over 400 local governments (to restrict). Public service delivery in fact determines the accessibility of education for children or youths which in turn will affect social mobility. The government indeed has not stayed silent. A wide range of social programs and policies in Indonesia however are mostly residual or minimalist in nature. The social security system is regarded more as “widefare” instead of “welfare” as it fails to generate meaningful benefit for the people. As a consequence, the government’s good intentions have been ineffective in reducing inequality. The government of Indonesia has set aside budget for various social programs, but have been futile in addressing the inequality problem. Public funds allocated for fuel subsidy, fertilizer and seedling subsidy, rice subsidy (raskin), school operational funds (BOS), National Community 135
Empowerment Program (PNPM), maternity insurance for the poor (jampersal) and family welfare program (PKH) are well‐intended yet may still be problematic. Inequality and Presidential Candidacy A noteworthy article was recently released in the U.S. by an economist. It was written by Vikram Nehru (2013) and published by Carnegie Endowment, a leading research institute. Nehru wrote that Indonesia may elevate its status as a rich and advanced country with a per capita income of over 12,600 dollars by 2035. This means that in the next 20 years, Indonesia’s income will leap fourfold compared to 2013 (USD 3,500). This is achievable given Indonesia’s economic growth at an average of 7.8 percent from 1968 to 1998. On the other hand, Nehru stated that the newly elected government will later need to prioritize five agendas, one of which is narrowing inequality, particularly inequitable opportunities in accessing health care, education, employment and others. Another priority agenda is strengthening the manufacturing industry, infrastructure development, environmental protection and conservation, and quality education. It is therefore advisable to place the responsibility of tackling inequality on the highest duty‐
holder, namely the President, and to not merely hand it over to a minister, governor and mayor. Inequality should also become part of Indonesia’s development priority parallel with education and infrastructure. Why is this so? And who shall be the presidential nominee to undertake this task? The issue of inequality has never been a topic of discussion or debate in Indonesia’s two earlier elections in 2004 and 2009. It is now time for presidential and legislative hopefuls whom the people will be voting for to discuss and take a definite stance on plans to deal with the issue. There have been earlier attempts to bring inequality down in Indonesia. In 2011‐2013, the PDIP parliamentary faction has proposed that development success should also be measured in terms of the extent to which inequality/Gini ratio has been reduced. For the medium‐term development plan under President SBY (2009‐2014), inequality was not included as part of the government’s indicators of success. The President and parliament or political institutions play a decisive role as decisions on the national budget rest with the President and cabinet ministers. The President and Bank Indonesia (BI) are also determining factors in striking a balance between price stabilization/inflation control and lowering unemployment/stimulus. The political mechanism or cycle is closely associated with the widening or narrowing of inequality: (a) the extent to which the President places priority on tax policies; (b) the extent to which the President prioritizes social spending; (c) the extent to which tax and transfer policies have reduced inequality. On the other hand, the President must also remain independent and be bold enough to resist the vested interests of the super‐rich and their significant influence in 136
politics among others by not providing compensation, facilities and tax exemptions to the ultra‐
rich. The following framework may help address the issue of inequality: Source: Author, 2014 Efforts to narrow disparities shall be highly beneficial for Indonesia, not only for the elites but also all citizens. (1) economic growth will become more sustainable to be enjoyed universally by all layers of society, and not only exclusively by the upper‐class (artists, politicians, high‐ranking public officials and businessmen), (2) greater support to the government, democracy, and politics as citizens can tangibly enjoy the benefits of development. Lessening inequality will also bring substantial non‐material benefits for fostering community harmony, social cohesion and social stability, and strengthening national identity among others by (3) preventing and neutralizing religious radicalism that currently undermines national unity and sense of mutual‐help, (4) 137
building solidarity among the people across Indonesia which will directly strengthen national unity. Furthermore, reducing inequality is not “mission impossible” and neither is it about cutting‐edge technology unreachable to Indonesia such as the advanced technology applied for space shuttles. In other words, political will is an absolute necessity along with the astuteness to learn from Indonesia’s own experiences and that of other countries to help Indonesia find the most viable solution. Indonesia’s past development experience under Widjojo Nitisastro in the 1970s can help shape Indonesia’s course of development today which involves large‐scale interventions in the education and health sector. The 1970s has seen the emergence of a healthy and educated population. National bank BRI for example has consistently worked towards developing micro and medium‐
scale enterprises across Indonesia and this wealth of experience can be replicated to expand the growth of mid‐scale businesses in various cities throughout Indonesia. Industrial policies that support the capacity enhancement of local and national industries which have been implemented before, can also reduce Indonesia’s dependency over imported commodities in an effort to reduce the balance of payments deficit which has continued for the past 10 years. The experiences of other countries such as Brazil need to be taken into consideration. Under President Luiz Inacio Lula, Brazil’s ability to curb inequality has gained recognition. Its welfare programs such as zero hunger, bolsa familia, increasing minimum wage and universal health insurance have proven to be effective in reducing inequality. The government deservedly secured the people’s support and was reelected for the second consecutive term. Three key lessons can be drawn from the experiences of developed countries with low inequality such as Sweden and Scandinavian countries: the government’s role, the government’s role and the government’s role. In other words, the active and assertive role of the government in correcting market failures (labor market, information market. etc.) Narrowing inequality essentially requires the government to reduce or even eliminate neoliberal policies that leave the people’s fate at the mercy of market fluctuation and any leftover gains from economic growth. This is because every individual has different talents and capacities, while socio‐economic opportunities are unequal. Furthermore, not all goods and services can be treated as tradable commodities (clean water, health care, education, clean air, the environment, tolerance and non‐discrimination). The government and politics (good politics) need to differentiate and determine rights and public goods (you get what you need) that must be defended and protected by using all that is in their power, including the institutional structure, and commodities and privatization oriented towards free market mechanism (you get what you pay) – see Box 1 Winner Takes All. 138
Box 1 WINNER TAKES ALL: POLITICAL ANALYSIS OF INEQUALITY IN THE UNITED STATES Jacob S. Hacker from University of Yale and Paul Pierson, University of California, Berkeley in their work Winner­Take­All Politics: How Washington Made the Rich Richer and Turn Its Back on the Middle Class (2010), or WTAP, have found that economic inequality in the U.S. in the past 30 years is highly determined by federal government policies and Washington politics. Hacker and Pierson probed into three main symptoms: (i) why and how does hyperconcentration of income occur? (ii) why and how does hyperconcentration occur endlessly; (iii) how does minimum social benefit for the non‐wealthy came about? Unlike other analyses, Hacker and Pierson discovered that the main cause is not only technological transformations (labor substituted by machines and computers). The main factors include the following (i) minimum government role (doing much less) in taxation and benefits for the super‐rich (very top); (ii) political leaders through various laws and regulations have allowed policies to become outdated, failing to effectively regulate the economy (financial sector); (iii) lack of government role with regard to market regulations that affect taxable income (market income). As illustrated in WTAP, government role in making inequality worse can be described through the following diagram: 139
What role does political parties play within this framework? The Democrats and Republicans have both contributed in widening economic disparities. Many biased policy changes (tax deduction for the super‐
rich and the wealthiest 1%) are supported by both sides. In terms of the influential power that both parties wield – Republican and Democratic – it appears that the Republican party’s domination is real and significant. The Republican party has consistently build its organizational capacity to shape policies through business lobby groups and think‐tanks, whereas the Democrats are increasingly financially reliant on financial companies, including CEOs, managers and stockbrokers in Wall Street. Data collected by Hacker and Pierson showed inequitable income growth from 1979 to 2006 among different layers of society. The richest 1% experienced a dramatic rise in income, and on the contrary the income of the poorest of the poor remains constant and even registered a declining trend. If growth had been equitable, the bottom rung of society will also be wealthier and improve for the better. Unequal Growth (Richistan) Vs Shared Prosperity (Broadland) (WTAP‐, Hacker and Pierson, 2010 p. 25) Bottom 5th Second bottom 5th Median Third layer 80‐90th layer 90‐95th layer 95‐99th layer Top/Richest 1% Unequal Growth (Richistan, real growth 2006) US $ 16,500 35,400 52,000 73,000 100.915 132,258 211,768 1,200,300 Shared Prosperity (Broadland, if all groups experience income growth 1979 and 2006) US $ 22,366
45,181
64,395
84,209
106,696
128,714
181,992
506,002
Richer or poorer in Broadland 2006? 5,866 (richer) 9,781 (richer) 12,295 (richer) 10,409 (richer) 5,781 (richer) 3,544 (poorer) 29,776 (poorer) 694,298 (poorer) Three Scenarios: Reducing Inequality Inequality encompasses a broad spectrum. From fiscal and tax policies to public services. Land‐
related issues and agrarian conflict, and the people’s difficulty in accessing modest, affordable housing in major cities such as Jakarta. From high‐profile corruption cases to the quality of bureaucracy at the national and sub‐national level. First scenario, the government focuses more on institutional strengthening and the accountability of data and institutions/operations with the purpose of improving capacity, quality and performance. The government for example ensures that bureaucratic reform conforms with the 140
new law (ASN 2013), guarantees and accelerates the implementation of JKN‐BPJS‐Health and BPJS‐Manpower, strengthens government watchdog agencies such as KPK, UKP4, BPK and BPKP, and restructures and consolidates the Directorate General of Taxation, BPN, BPS and LIPI. Second scenario, in addition to institutional capacity building, the government at the same time initiates policy change, including with regard to BI policies (lowering interest rates), financial sector regulations, tax policies, minimum wage and unemployment benefits, reallocation of fuel subsidy and changes to fertilizer subsidy, wealth development for the people including for land and housing, government support for expanding cooperatives as well as small and medium‐sized economic sectors. Third scenario, the government focuses on three elements simultaneously: policy change, institutional strengthening and accountability. Under this scenario, the government needs to make the necessary investments for intensifying monitoring and data collection efforts that have long been disregarded. The government for example can expand and strengthen UKP4 to immediately remove obstructions and barriers on the ground. The government can also strengthen BPN, BPS, Ministry of Manpower, Ministry of Agriculture, LIPI, universities and other agencies. What must be done and how? In reference to Indonesia’s own experience and that of advanced countries, in addition to various studies and findings on inequality in developed nations and Indonesia, the following are policy options that presidential and legislative candidates can take into account related to policy change, institutional strengthening and accountability/operations (see Annex 4): First, government role and public policies genuinely oriented toward promoting equality and redistribution, and not otherwise. The necessary measures include (i) reduce the concentration of income and wealth among the top earners inter alia through taxation and placing a salary and bonus cap for the financial sector (ii) fiscal policy, specifically taxes, can become an effective government instrument, such as by restructuring fuel subsidy; replacing in‐kind subsidy with cash subsidy and targeting, and broadening financial access to expand small and medium‐scale enterprises. Second, government role can optimally reduce income inequality in the labor market among others by (i) broadening access to better quality public services, such as education and employment opportunities, and (ii) increasing minimum wage to allow households to lead decent lives. Third, government policies and measures in expanding wealth (land and housing) and financial access for citizens, including through land reform and opening up access to land for smallholders and landless farmers, and widening access to financing for citizens and micro‐to‐medium‐scale entrepreneurs. Fourth, government efforts to build the capacity of government agencies, directly related to wealth development and social mobility of the people, such as BPN, BPS, Ministry of Housing and Ministry of Manpower. 141
5­year Target Intervention Policy Change =>Reducing inequality/Gini ratio included as a development indicator of success in RPJM and RKP 2015‐2019 =>Balancing BI policies, not only for maintaining low inflation rates/price instability, but also reducing unemployment =>Increasing tax revenue up to 19‐24% of GDP among others by imposing a 45% tax rate on the super‐rich/top 1% (income over Rp. 5‐10 bn per year) => Increasing social spending/transfers to 5% of GDP =>Reallocating fuel subsidy, reforming fertilizer and seedling subsidy => Expanding PKH into Basic Income Reducing Gini Ratio/Index from 0.41 to 0.35 Narrowing income and wealth inequality Equal opportunities (health care, employment, scholarship, etc.) Equitable infrastructure and energy for regions outside of Java Institutional Strengthening
Accountability => Strengthening resources and Making new data available institutional personnel such as KPK, a.
Prepare annual report on BPK, BPS and UKP4 Gini index b.
Prepare report on the =>Strengthening and restructuring people’s wealth development BPN c.
Produce new databases: Not only administratively, but also poverty rates pre‐ and post‐
make sure that land reform protects government intervention farmers and indigenous peoples d.
Collect and update data on salary and wage gap between =>Ensuring that JKN (health men and women insurance) is implemented and e.
Access to education and accepted by all Indonesian citizens, health services for men and including the elderly, persons with women disabilities, and indigenous f.
Wealth databases of communities every household in Indonesia every two years =>Ensuring that BJPS‐Manpower (pension benefits, occupational accident insurance, etc.) is well executed => Ensuring that public services in 400 cities and districts are adequate and of high quality. a. setting a 40% cap on bureaucratic and political spending (DPRD/elections) from local budgets (APBD) b. Setting a minimum limit on expenditure for education, health care and clean water (30%) from APBD 142
Annex 1 Three Inequality Measurements Measurement 
Gini coefficient 

Method Inequality in all layers of society

Maximum inequality = all income received by 1 person and 99 others get nothing = Gini ratio = 1 
Minimum inequality = all income is shared equally = Gini ratio = 0 Comparison between income levels in society. For example 20/20 Ratio compares the income of the top 20% and the bottom 20% Common ratios:  50/10: Inequality between the middle and bottom of the income distribution  90/10: Inequality between the top and the bottom  90/50 : Inequality between the top and the middle  99/90: Inequality between the very top and top Palma ratio Measures the income share of the top 10% to that of the bottom 40% Palma attempts to correct the Gini method that is (i) over sensitive to changes in the middle of the distribution and (ii) insensitive to changes at the top and bottom. In more equal societies, the Palma index will be 1 or below. This means that the wealthiest 10% do not receive a larger share of income than the bottom 40% In unequal societies, the Palma index may be as large as 7. Examples are U.K.: 1.07 and Brazil:2.23 Source http://www.equalitytrust.org.uk/about­inequality/scale­and­trends 143
Annex 2 Studies on Inequality in Indonesia Author/Institution SEADI Discussion Paper#17/Arief Anshory Yusuf et. al. “Evolution of Inequality in Indonesia 1990‐2012” Hamong Santono “Ketimpangan dan Implikasinya Bagi Pembangunan Indonesia” [Inequality and its Implications for Indonesia’s Development] Dwi Rubyanti Kholifah “Ada apa dengan Ketimpangan” [What’s Wrong With Inequality] Year 2013
Finding/Recommendation 
Income inequality has risen significantly in 1990‐2012 
Drastic changes in the last 10 years 
Convergence of inequality is evident among provinces but not between regions 
Income inequality needs to be a priority agenda 
Inequality hampers the ability to attain development goals 2013
2013
Andy Sumner, Asep Suryahadi 2012
and Nguyen Thang “Poverty and Inequality in Middle‐Income Countries In SouthEast Asia” 
Non‐income inequality should be included in future development agenda 
Gender inequality is a key barrier to development in Indonesia 
Future research agenda 
Poverty enclaves are largely found in middle‐income countries such as Indonesia and Vietnam, and not in low‐
income countries 144
Annex 3 Studies on Inequality in Other Countries Author/Institution Year 1.
“Humanity Divided” 2013
Confronting Inequality in Developing Countries” ­ UNDP 2.
“Divided We Stand: Why Inequality Keeps Rising” ‐ OECD 3.
Nancy Birdsall “Income distribution: Effect on Growth and Development” 4.
Paula Casal “Love not War: On the Chemistry of Good and Evil” 2011
5.
Robert Putnam et.al. “Growing Class Gaps in Social Connectedness among American Youth” 6.
Joseph Stiglitz “The Price of Inequality” 2012
2007
2011
2012
7.
A.B. Atkinson “Reducing Income Inequalities in Europe” 2013
8.
Branco Milanovic “Why Income Inequality Is Here to Stay” 9.
Andrew G. Berg and Jonathan D Ostry­IMF “Inequality and Unsustainable Growth: Two Sides of the Same Coin” 10.
John Roemer “The Ideological Roots of Inequality and What is to be Done” 2013
2011
2011
Finding/Recommendation High inequality debilitates the economy, democratic life and social cohesion. In the past 20 years, inequality has sharply risen. From 1990 to 2010, income inequality has grown 11% in developing countries Widening gap between the wealthiest 10% and poorest 10% in OECD member countries Negative correlation evident in low‐income countries (income per capita below $ 3200 in 2000) when inequality equals to and above 0.45 (Gini ratio) Female elephants and gorillas exhibit good moral sense relevant to the human institution, that the male species do not possess. The females are bestowed with specific hormones known as oxytocin – that stimulates a sense of compassion, empathy and affection, of being protective and non‐violent. Inequality among the younger generation determined more by social class rather than race Economic inequality in the U.S. is inextricably linked to politics. Political capture by the financial elites The need to think “out of the box” to seek workable solutions Citizen income or basic income should be considered for the EU zone Two solutions for inequality: Rawlsian theory calls for moderate improvements or the more radical Roemerian More sustainable economic growth is associated with more equitable distribution of income Nozick puts forward moral justification for inequality. Two economic theories that consider inequality justifiable (a) Rational expectation and (b) efficient market hypothesis 145
Annex 4. Examples of Policy Recommendation for Reducing Inequality Author/Institution Policy Source Recommendation/Implication Eduardo Matarazzo  Bolsa Familia needs to shift “Toward An Suplicy (2011) unconditional basic towards Citizen Basic Income Brazil’s Senator, Income in Brazil” prominent PT figure and economist Thomas Piketty and  Inheritance tax considered optimal http://piketty.pse.ens.fr/
Emmanuel Saez for the U.S. and France ranges files/PikettySaez2013.pdf
Paris School of Economy between 50% and 60% or higher Laura Tyson (2014)  Broaden the impact of government http://www.project‐
syndicate.org/ Obama’s economic tax and transfer adviser  Expand social security  Increase minimum wage Donald Kaberuka  Universal access to education for http://www.project‐
syndicate.org (2014) poor households President of Africa  Cash transfer based on Bolsa Development Bank Familia  Basic Income based on the Alaska model Dylan Matthew (2012)  10 ways to reduce inequality http://www.washington
Washington Post without raising taxes, include (i) post.com/blogs/wonkblo
journalist facilitate workers to join labor g/wp/2012/12/06/ten‐
unions; (ii) Central bank supports ways‐to‐reduce‐
inequality‐without‐
credit supply raising‐tax‐rates/ Bruce Ackerman  Cash benefits known as citizen The Stakeholder Society (1999) stakeholding to the amount of 80 University of Yale thousand for population aged 18 Philippe Van Parijs  Basic income disbursed monthly Real Freedom for All (1995) unconditionally to all citizens Catholic University of Louvain‐UCL A.B. Atkinson (2011)  Government provides universal http://www.nuff.ox.ac.uk
University of Oxford basic income, known as /users/atkinson/Basic_In
come%20Luxembourg%
participation income 20April%202011.pdf George McGovern  Citizen basic income known as (1972) universal demogrant for USD Presidential candidate 1000 on a monthly basis from Democratic Party 146
Author/Institution Policy Source Recommendation/Implication James Tobin,  Government offers guaranteed http://en.wikipedia.org/
Samuelson and 1200 wiki/Guaranteed_minimu
minimum income economists (1968) m_income Thomas Paine (1795)  Government needs to provide cash “Agrarian Justice” benefits for all citizens known as citizen dividend on a yearly basis Khalifah Abubakar  Universal basic income, including http://en.wikipedia.org/
wiki/Guaranteed_minimu
women and children (annually) m_income 147
Annex 5 Remuneration Survey (Salary and Benefits) of Indonesians CEOs Source: “Top 100 ­ Average BOD Remuneration of Public Companies, 2012.” SWA Magazine 2013, pp. 32­35. Company Name (2012) Astra International Tbk Indofood Sukses Makmur Tbk Telkom tbk BRI Tbk BCA Tbk Surya Citra Media Tbk HM Sampoerna Tbk Adaro Energy Tbk Medco Energi International Indika Energy Tbk PP London Sumatra Tbk Gudang Garam Tbk Unilever Indonesia Tbk Tiphone Mobile Indonesia Tbk Amount/ Number of Directors /year Rp. 73 bn
9 persons Rp. 42 bn
8 persons Rp. 31 bn 8 persons Rp. 18.15 bn
11 persons Rp. 19.43 bn
10 persons Rp. 17. 46 bn
2 persons Rp. 9.13 bn
7 persons Rp. 9.33 bn
6 persons Rp 8. 77 bn
5 persons Rp. 6.78 bn
7 persons Rp. 6.31 bn
8 persons Rp. 4.53 bn
8 persons Rp. 4.41 bn
9 persons Rp. 3.26 bn
3 persons Monthly remuneration Rp. 8. 1 bn Rp. 3.5 bn Rp. 2.6 bn Rp. 1.6 bn Rp. 1.9 bn Rp. 8.73 bn Rp. 1.3 bn Rp. 1.55 bn Rp. 1.7 bn Rp. 968 million Rp. 788 million Rp. 566 million Rp. 490 million Rp. 1.2 bn 148
Annex 6 List of Research Institutes on Inequality Source: http://www.equalitytrust.org.uk/resources/links U.K.  The Equality Trust interest group http://uk.groups.yahoo.
com/group/EqualityTI
G/  Sheffield Equality Group http://www.sheffieldeq
ualitytrust.org.uk/  London Equality Group http://londonequality.o
rg.uk/  Action for Happiness http://www.actionforh
appiness.org/  Campaign for a Fair Society http://www.campaignf
orafairsociety.org/p/ho
me.html  Centre for Welfare Reform http://www.centreforw
elfarereform.org/  Citizens Advice Bureau http://www.citizensadv
ice.org.uk/  Economic and Social Data Rankings Europe  ECINEQ (Society for the Study of Economic Inequality)
http://www.ecineq.o
rg/  Equalities Study Centre, University College, Dublin.
http://www.ucd.ie/e
sc/index.html  Luxembourg Income Study (LIS) data on income distribution in different countries.
http://www.lisprojec
t.org/  Polarization and Conflict http://www.polarizat
ionandconflict.org/  Observatoire des inégalités http://www.inegalite
s.fr/ U.S. and Canada  Dateline: powerful TV programme showing the reality of poverty & inequality in the USA
http://www.msnbc.msn.
com/id/21134540/vp/3
8363219#38363219  Too Much: a commentary on excess and inequality
http://toomuchonline.or
g/  IPS Program on Inequality and the Common Good
http://ips‐
dc.org/resources/EI‐
Year‐End‐Appeal.pdf  Bridging the income gap
http://crofsblogs.typepa
d.com/gap/  Class Action: building bridges across the class divide. http://www.classism.org
/  Explorations in Social Inequality http://www.trinity.edu/
~mkearl/strat.html  Inequality.org 149
U.K. Europe http://www.datarankin
g.com  Information on UK inequality statistics http://www.statistics.g
ov.uk/cci/nugget.asp?id
=332  Institute of Fiscal Studies http://www.ifs.org.uk/  New Economics Foundation http://neweconomics.o
rg/gen/  Sustainable Development Commission http://www.sd‐
commission.org.uk/  Public attitudes to economic inequality http://www.jrf.org.uk/
KNOWLEDGE/findings/
socialpolicy/2097.asp  The Poverty Site for UK statistics on poverty and social exclusion. http://www.poverty.or
g.uk/  Where do you fit in? http://www.ifs.org.uk/
wheredoyoufitin/  Wikipedia on measures U.S. and Canada http://www.demos.org/i
nequality/  Population Health Forum
http://depts.washington.
edu/eqhlth/  United for a Fair Economy http://www.faireconom
y.org/  Centre on Budget and Policy Priorities
http://www.cbpp.org/p
ubs/povinc.htm 150
U.K. Europe of income inequality http://en.wikipedia.org
/wiki/Income_inequalit
y_metrics  The Centre for Progressive Economics http://www.centreforp
rogressiveeconomics.co
m U.S. and Canada 151
Annex 7 Difference Between Inequality and Poverty Being poor means living under dismal conditions far from a standard considered decent or comfortable in a society. Poor refers to the inability or lack of capacity to satisfy basic needs for leading a decent life (income, food, housing, education and health). Poverty can be absolute and relative depending on how poverty is measured. Absolute poverty is the worst condition of deprivation that remains unchanged over time, whereas relative poverty refers to changeable measurements. In the U.K., the poverty line is set at less than 60% of the median household income (median income). Inequality on the other hand will consistently be relative because it refers to the difference or gap between income levels of the population and standards of living within a range of economic and non‐economic distribution. As a consequence, poverty and inequality can rise and fall at the same time, but can also differ and non‐simultaneous in nature. For example (a) low poverty rate (rich economy, or sizeable economic pie relative to GDP), but high inequality due to a marked difference between the highest income and the middle to lower income; (b) poverty reduction programs may have been effective, but inequality has worsened among income levels and demographic groups. In other words, it is crucial to identify and promote government policies and programs that also reduce poverty and inequality. 152
Annex 8 Data and Statistical Needs in Indonesia Type of Data Information Generated 1.
Indonesia Income  Classification of income: Statistics (Statistik ‐5 income levels, or Pendapatan Indonesia, SPI) ‐10 income levels  Market Income (before tax)  Income After Tax  Annual  Scope: past 10 years 2.
Indonesia Poverty  Poverty rates before Statistics (Statistik government intervention Kemiskinan Indonesia, SKI)  Poverty rates after government intervention  Annual data 3. Program Performance  Realization and impact of Monitoring Report fertilizer subsidy, BOS,PKH, (Laporan Pemantauan JKN Kinerja Program, LPK  Mid‐year and annual report Program) 4. Indonesia Labor  Number of job seekers from Statistics (Statistik different levels (university Tenaga Kerja and high school graduates) Indonesia, STKI)  Length of time to secure employment  Time utilized by job seekers  Annual data 5. Citizen Financial  Access to financing for Statistics (Statistik citizens from financial and Keuangan non‐financial institutions Warganegara, SKW)  Two types of data: general to all citizens and specific to certain groups such as fishermen, farmers, housewives, senior citizens and persons with disabilities  Annual data Notes Status : New data Source SPT By Directorate General of Taxation – Ministry of Finance Status: New/updated data By BPS Status: New data By Bappenas, BPS, BPKP, BPK Status: New data By Ministry of Manpower and BPS Status: New data By BPS and BI 153
About the Authors Ah Maftuchan is a researcher and trainer specializing on themes related to social development, primarily social policies, governance, planning, budgeting and community development. Maftuchan studied Constitutional Law and Islamic Penal Code at Sunan Kalijaga Islamic State University (UIN) in Yogyakarta before earning a master’s degree in social development and regional autonomy from the University of Indonesia. With his academic credentials, Maftuchan further developed his interest in these subject areas by actively being involved in public policy advocacy specifically directed at legislators and local governments. He also plays a central role in coordinating various civil society coalitions, conducting research and writing books and papers. Since his university years, Maftuchan has been actively involved in a number of civil society organizations, mainly dedicated to community development and policy advocacy. Upon finishing university, he joined Gesellschaft für Internationale Zusammenarbeit – GIZ (formerly Gesellschaft für Technische Zusammenarbeit ‐ GTZ) GmbH under the good governance program mainly related to population administration in the province of Aceh from 2007 to 2009. From February 2009 to date, Maftuchan has worked with Perkumpulan Prakarsa, a Jakarta‐based research and development institute, as an analyst, researcher, trainer and project manager. He also actively serves as a commissioner of the Independent Budget Commission (KAI), a leading group advocating for pro‐poor budget policies and building public awareness on government budgets. He is also a founder of Indonesia Tax Justice Forum, a tax research and policy advocacy group. Since 2010, Maftuchan was included in the governing board of Nahdlatul Ulama Institute of Human Resource Studies and Development (LAKPESDAM NU). Firdaus hails from a family of metal traders in the village of Adiwerna, Tegal in Central Java. He obtained his master’s degree in social science from the University of Indonesia, Depok. His area of expertise focuses on organizing NGOs and small‐to‐micro women enterpreneurs primarily in the economic and social sectors, in addition to building critical awareness. Since 2002, he has accumulated a wealth of experience in managing economic and political development programs for grassroots women, promoting micro‐
finance institutions with a gender perspective, and facilitating social movements at the grassroots level. Aside from his dedication to the grassroots community, since 2007 he has devoted part of his time teaching sociology at a private university in Jakarta. Socio‐economic research is another area in which he has shown much interest in. Known to family and friends as “Idos”, he has conducted various studies published as books, articles, papers and modules by different journals and media such as Kompas, Media Indonesia, Pelita, Harian Terbit, Jurnal Analisis Sosial Akatiga Bandung, Jurnal Perempuan, Jurnal Reformasi Ekonomi (published by Lspeu, Indonesia), and Social Watch Report 2010. In between his work as an activist, he also participates in various writing clinics and journalism training including those organized by the Institute for Information Studies (ISAI) and TEMPO magazine in 1998. His dedication to micro, small and medium‐scale enterprises as well as social and economic issues and critical awareness has led him to win a writing competition on micro‐finance organized by University of Indonesia’s Management Institute and Coordinating Ministry for People’s Welfare in December 2004 with his winning entry “Building Micro‐Finance with a Gender Perspective” published by MANAJEMEN USAHAWAN Indonesia magazine for its NO.01/TH. XXXVI JANUARY 2005 edition. Idos now serves as ASPPUK’s National Deputy Executive Secretary, and a member of PPSW‐PEKKA‐ASPPUK Employee Cooperative Supervisory Board. He also acts as facilitator, resource person and consultant for various community groups as well as national, international and government agencies. One of his works includes a book titled “Lembaga Keuangan Perempuan (Konsep, Praktek dan Dampak)”, Jakarta: ASPPUK and NZAID, 2007. He can be contacted at [email protected]. Herjuno Ndaru Kinasih is a social researcher with specific attention to economic and development issues. Herjuno is currently a researcher at the Habibie Center. He was previously part of Trade Knowledge Network (TKN) Southeast Asia, Institute for Global Justice (IGJ), Forum Asia and Pacivis University of Indonesia, and formerly a consultant for ASEAN Secretariat. Herjuno earned both his master’s degree in the science of social welfare ( 2010) and bachelor’s degree in international relations majoring in international political economy from the University of Indonesia (2006). He has represented Indonesian civil society organizations in several international conferences related to the G20 Summit and ASEAN. With INFID, Herjuno is involved in research on financial inclusion in G20 and inequality issues. Herjuno can be contacted at [email protected] . Irhash Ahmady, born in Bukittinggi on 26 November 1979, is an environmental activist currently acting as Walhi National Executive Board’s Knowledge Management Manager. A seasoned activist, Irhash has built a reputation for his activism since his university years in Bandung in 1999 where he was elected the student body executive for the Department of Literature, while participating in efforts to organize students, farmers and workers. He also among others played a part in the people’s advocacy against the Jatigede Dam and the suppression of labor unions in 2002. Several organizations have become part of his life’s journey. Since 2004 he has taken the environmental path when he became involved as an executive for the West Java branch of Walhi. He is co‐author for a book published in two versions titled Java Collapse; Dari Jalan Raya Pos ke Lumpur Lapindo, Insist 2008. In 2009, he was appointed member of Walhi’s National Executive Board and still serves on the board. Theresia Mike Verawati Tangka, born in Bontang, East Kalimantan in 1977, currently holds the position of the coordinator of the Public Policy Reform Working Group at the National Secretariat of the Indonesian Women’s Coalition for Justice and Democracy. In addition to monitoring policies at the national level, she is also involved in advocacy work related to the capacity building of members of parliament and local governments pertaining to parliamentary work and implementation of constitutional policies that promote gender justice. Graduated in psychology from the Department of Social Sciences of University of Surabaya, she actively monitors and prepares alternative reports to the UN. Since 2005, she developed the necessary instruments and reported on the implementation of CEDAW by the Government of Indonesia, as well as the Convention Against Torture (CAT), Covenant on Civil and Political Rights (ICCPR), Covenant on Economic, Social and Cultural Rights (ICESCR), civil society report on achieving the Millennium Development Goals and Universal Periodic Review (UPR). Several modules on capacity building have also been prepared, including for Indonesian Women’s Coalition cadre education, public policy advocacy, anti‐corruption education, political skills, political campaign management for women legislative candidates and voter education for elections. In the past 10 years, she has conducted studies on different issues, such as public health in East Java (2000), media analysis in relation to the elections (2004), baseline food security survey in East Indonesia (2004), and baseline informal workers study in Java (2006). She also provides facilitation and counsel to the Catholic Youth Campus – Diocese of Jakarta. Sugeng Bahagijo currently serves as the Executive Director of INFID. He formerly worked with KID (Komunitas Indonesia untuk Demokrasi, Indonesian Community for Democracy), an institution dedicated to democracy education, and was actively involved in Perkumpulan Prakarsa as an executive. He was also part of the Bappenas team of experts assigned to draw up the poverty eradication strategy document (SNPK). Sugeng has authored several books including Mimpi Negara Kesejahteraan: Telaah Dinamika Peran Negara dalam Produksi dan Alokasi Kesejahteraan together with Darwawan Triwibowo, and named editor of Globalisasi Menghempas Indonesia. He studied philosophy at UGM and human rights at HRW. Sugeng was conferred the title of Visiting Fellow by IDS Sussex University and Visiting Researcher by UCL Louvain la Neuve‐ Belgium. Sugeng is also a prodigious contributor of articles published in national dailies, including, Jakarta Post and Bisnis Indonesia. Tursia is a woman activist who graduated in anthropology from Udayana University. Her main interest lies in cultural analysis and changes to society; a passion which she has pursued since her days at university. She writes profusely, focusing on short stories as vehicles for social criticism, and poems depicting social issues. From 2009 to 2013, Tursia joined the Association for Community Empowerment (ACE) as Program Coordinator on Promoting Women’s Participation in Policy‐Making Processes from the Village to District Level. This program succeeded in encouraging poor women and marginal groups to take the initiative in conducting musrenbang (development planning deliberative forum) for women until the district level. Tursia is currently actively involved in advocacy work on gender justice, primarily women’s engagement in policy‐making processes and women’s position in politics. Apart from women’s political representation, Tursia is also intensely engaged in efforts to strengthen women’s role in businesses which among others has provided women with economic options through micro enterprises and by encouraging grassroots women to be self‐reliant. In collaboration with the women’s entrepreneurship network, she has helped push for laws and regulations that protect small businesses managed by women. Yustinus Prastowo, born in Gunung Kidul Yogyakarta, completed his higher education at STAN Jakarta and later earned two master’s degree, one in philosophy from STF Driyarkara and the other in public administration and policy from the University of Indonesia. He previously served at the Directorate General of Taxation, Ministry of Finance (1997‐2011), research associate at Perkumpulan Prakarsa and senior researcher at the Independent Budget Commission (KAI). At present, he is the Executive Director of the Center for Indonesia Taxation Analysis (CITA), Jakarta. Yustinus is also a lecturer at several private universities in Jakarta, resource person in numerous tax seminars and training courses, and a contributor of articles featured in Kompas, Koran Tempo, Majalah Tempo, Indonesia Tax Review, Majalah Pajak, Majalah Basis, Jurnal Response Atma Jaya University, and Kemitraan. He has authored a number of books, inter alia, Manfaat dan Risiko Memiliki NPWP (Penebar Swadaya, 2009), Panduan Lengkap Pajak (Penebar Swadaya, 2009) and Buku Pintar Menghitung Pajak (Penebar Swadaya, 2011), and contributed in the book on Pembangunan Inklusif (LP3ES and Prakarsa, 2011), and Merajut Kembali Nusantara (2013). Published research covers code of ethics compliance at the Directorate General of Taxation (TII, KPK and UNODC; 2012) and public examination of the Supreme Court’s decision on Suwir Laut and Asian Agri Group (ICW and ILRC: 2014). He also acts as resource person in training programs organized by Perkumpulan Prakarsa, Indonesia Corruption Watch, INFID, British Council, State Intelligence Agency (BIN), Bank Indonesia, U.S. Embassy and others.