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Indonesia struggles with widening wealth gap

Yuko Fukushima

Sep. 19, 2017

Twenty years ago, the Asian currency crisis led to social and economic upheaval in this part of the world. One of the hardest-hit countries was Indonesia. Southeast Asia's biggest economy has made major strides since the crisis, moving from a low-income to a middle-income country. GDP is expanding at a steady rate. But a World Bank report warns this growth is coming at a cost -- an ever-widening gap between rich and poor. We bring you the first of a 3-part series looking at where Indonesia stands today.

A high-end department store in Jakarta has luxury brands, steep price tags, and shoppers with deep pockets. More Indonesians than ever are enjoying the good life. One study classed 44 million as upper middle class out of a population of 250 million.

"I got a few new cars in the past 10 years. I also moved to a new neighborhood. I think I have changed a lot," says a male shopper.

Although Indonesia's economic growth has benefited the rich, some were left behind, like the residents living in slums not far from Jakarta's posh central district.

Slums like this are scattered across Jakara -- and these people represent just a fraction of the Indonesians living in poverty. Nationwide, one in 3 live on 3 dollars or less a day.

"I barely have enough to eat from day to day," says a slum dweller.

The gap between rich and poor is even greater in regional areas. Rukini is a grandmother – and the only one in her family earning money. She provides for 8 people comprising 2 households. "I make about 2 dollars a day selling fish and other things. Some days, they don't sell at all, so I collect cans on the riverbank to sell," she says.

Her daughter, Risma, quit school in the 7th grade. The family couldn’t afford to keep her in class. She's now 19 and has children of her own. "My husband and I and our 2 children sleep here. There's not much space, but it's all we have," she says.

The grandparents live in a room in the back with 2 other children. Rukini’s husband, 38 years old, is unemployed. "All I want is to live a normal life in a normal house. But I can't, and it makes me want to cry," she says.

Indonesia has witnessed significant change over the past 20 years -- 2 decades that began in turmoil. The Asian financial crisis started in Thailand, but Indonesia suffered the most. Its currency, the rupiah, lost 80 percent of its value in 6 months. The plunge led to sharp increases in food prices and triggered violent protests. Then-President Suharto, who had ruled the country for more than 3 decades, was forced to step down. Indonesia's economy contracted 13 percent in 1998 -- the worst in Asia.

The recovery started a few years later, thanks to Indonesia’s rich supply of natural resources. A surge in global commodity prices lifted export revenue. Since then, the country has maintained an average growth rate of more than 5 percent.

But the export boom did nothing to close the wealth gap. In fact, it widened. The Gini coefficient, an indicator of economic disparity, has continued to rise, while other Southeast Asian countries show signs of improvement.

Bambang Brodjonegoro is in charge of National Development Planning. He says natural resources make money – but only for a few. "We depend on oil and gas, and then wood or timber product, and after that, coal, after that, palm oil. So from time to time, whenever we have the booming, it was mainly coming from natural resources. But unfortunately, people with the ownership or concession of the natural resources gets the improvement much higher than the people who only work for, let's say companies doing the natural resources extraction," he says.

President Joko Widodo took office 3 years ago, promising to do a better job of sharing the wealth. He first scrapped subsidies for gasoline. Car owners protested, but it freed up more money for the government to spend on helping the poor.

This year, the Joko administration renewed its pledge to close the income gap. A main pillar of the plan is to subsidize vocational training. "The government needs to lead the way in improving people's skills. To do that, we need to strengthen training and tech schools," the president announced.

Many young people struggle to find work because they don’t have the necessary skills. The government funds training schools, but some of them are not keeping up with the times.

A school that trains auto mechanics recently teamed up with businesses to help upgrade its courses. Indonesian automaker Astra is taking part. It sends staff here to teach the latest skills -- know-how to land jobs.

"Maybe 30 or 40 years ago, the necessity of skill today, is for sure different. And we feel that sometimes the people that are graduated from vocational school, it's not met with our needs," says Hamdhani Dzulkarnaen Salim, President Director of Astra Otoparts.

The government is not alone in this kind of work. Fadilah Hasim runs an NGO – one of many on the frontlines of poverty. In 2011, Hasim’s group decided to build an elementary school.

Asked why he built the school, he replies, "Here, Krangan village, is one the poorest villages in South Tangaran city. So it's hard for them to send their children to expensive school."

The government subsidizes some tuition costs, but many parents cannot afford textbooks and other expenses. About 40 percent of the pupils at this school come from low-income families.

A student at this school, Chelsea, was able to continue her studies despite her family's financial troubles thanks to a proposal from Hasim's school.

"Things happened at my husband's work and we were unable to pay the tuition. But the school gave us an exemption by letting me provide cleaning services here. I'm truly grateful that my daughter was able to continue her studies," says Chelsea's mother.

"It takes a long time to reduce disparity. We need to extend a helping hand to the poor. If we can give children even a small opportunity to study, they may have a chance to break out of poverty. I hope education will help," says Hasim.

Indonesia’s economy has made remarkable progress since the Asian Financial crisis – but inequality is threatening to slow the pace of growth. Many economists say the government needs to take bolder steps to close the wealth gap. If not, the next generation will fall even further behind.

NHK World's Yuko Fukushima and Jakarta Bureau Chief Shinnosuke Kawashima join Newsroom Tokyo anchors Hideki Nakayama and Aki Shibuya.

Shibuya: Indonesia's government wants to narrow the wealth gap. But how exactly can that be achieved with those job training measures you mentioned?

Fukushima: Here's the problem -- there's a mismatch in the labor market. Job seekers are looking for unskilled work, which means low wages. But companies are always short of workers with more sophisticated skills. The government says correcting this imbalance will help close the income gap.

But people at some NGOs told me that's not enough. They say early education is important because that's where the income gap starts. This education deficit gets passed down the generations, leading to an even wider income gap.

Nakayama: Widening inequality is not just a problem in Indonesia. We see it happening around the world. Why has the Jakarta administration picked this issue as a top priority?

Fukushima: Bambang Brodjonegoro, the minister I talked to, said income gaps are wider in developing countries like Indonesia, where we've seen rapid growth in recent years.

In developed countries like the US and Japan, the infrastructure that people depend on -- like electricity, water and roads -- has already been built. That means even when there is a big income gap between rich and poor, the quality of life for those at the bottom end is not that bad.

But in developing countries, where crucial infrastructure is still missing, the life of the poor is very difficult. That makes it more likely inequality will lead to social unrest, creating an urgent challenge for the government.

Shibuya: We're going to bring in our Jakarta Bureau Chief Shinnosuke Kawashima. We've heard President Joko is taking new steps to reduce the income gap. Tell us more about what policies the administration is working on.

Kawashima: At the beginning of this year, President Joko announced 3 pillars aimed at closing the wealth gap. One is to support job training programs, as we saw in the report.

Another is land redistribution. Many farmers don't own the land they cultivate. So the government is working out ways to transfer ownership to these farmers, starting with state-owned land. This will allow farming families to borrow money using their land as collateral -- and that should raise productivity and incomes.

The third policy is more government support for shop owners and other small businesses. Once again, the idea is to make it easier for them to borrow money. Right now, mom-and-pop stores, for example, rely on unofficial money lenders who charge high interest rates. Affordable loans will allow small businesses to expand.

Nakayama: That all sounds great, but how will the government get the money it needs to fund these policies?

Kawashima: That's the big question. The tax collection rate in Indonesia is very low compared to other countries, and this is actually a major reason for social inequality. That's because the system to collect tax from high-income earners and redistribute it to the poor is not functioning.

The Panama Papers leaked last year were very revealing on this issue. They included names of many Indonesian Cabinet ministers and top business leaders, suggesting massive tax evasion among the wealthy elite. Last year, the government offered a limited tax amnesty in an effort to raise revenue. Officials say the amount of assets declared during the 9-month tax pardon was equal to about one-third of the county's GDP.

The finance minister says the government is planning more measures to boost tax collection. But with so many politicians avoiding taxes, it remains to be seen if the government will make much progress.