The
urgency of economic democratization
Ratih Hardjono, Jakarta | Opinion |
Mon, February 25 2013, 10:21 AM
Paper Edition
| Page: 6
One only hopes
that Indonesian economic policy makers were listening carefully to the speech
of Christine Lagarde, the managing director of the International monetary Fund
(IMF), at the World Economic Forum held in Davos in January 2013. Lagarde did
not mince her words in the excellent speech she delivered on why policymakers
must start addressing economic inequality.
“I believe that the economics profession and the policy community have
downplayed inequality for too long,” she said, adding that “surely we have all
learned by now that it is no longer enough to focus on growth alone. We need
all people to share in rising prosperity.”
Lagarde went on to say that “a more equal distribution of income allows for
greater economic stability, more sustained growth and healthier societies with
stronger bonds of cohesion and trust.” At the same time, she pointed out that
youth and women play a crucial role in economic growth.
Lagarde’s approach is certainly different from that of Michel Camdessus, who
was IMF director in the days of former president Soeharto, when the latter was
accused of being recalcitrant. Things have changed at the IMF.
One way to measure economic inequality is to use the gini ratio. In 2011,
Indonesia’s gini ratio was 0.41, which means that 1 percent of the population
held 41 percent of Indonesia’s total wealth.
The number looks even worse if the household gini ratio is considered; the
ratio of 0.65 means that 1 percent of Indonesia’s households control 65 percent
of the wealth of Indonesia’s households (Kompas, Oct. 30, 2012).
In 2011, an Indonesian NGO calculated that, based on a gini ratio of 0.41, the
wealth of the 40 richest Indonesians is equal to that of 77 million
Indonesians.
The thinking that economic growth without equality leads to instability is not
new. As early as 1910, president Roosevelt was already concerned about economic
inequality when he declared that the US federal government had a responsibility
to promote equality of opportunity and to attack special privileges and vested
interests.
Perhaps the book written last year by Nobel Prize winner Joseph Stiglitz,
entitled The Price of Inequality, spurred on discussion of this crucial issue,
which so many had been avoiding.
In Davos this year, Stiglitz told an elite audience that the richest 1 percent
of Americans now hold 25 percent of the country’s wealth and that this was causing
all sorts of social problems, especially among young people, in the US.
An in-depth and well-researched report by the weekly The Economist last year
focused on economic inequality. Its 25-page coverage on the issue investigated
the widening gap between rich and poor and found that inequality was one of the
most serious social, economic and political problems that the world was facing.
The Economist quoted the Asian Development Bank, which has argued that if
income distribution in emerging Asia had not worsened over the past 20 years,
the region’s rapid growth would have lifted an extra 240 million people out of
extreme poverty.
This is something for all of us Asians to think about!
The Economist stated that the close links between politicians and plutocrats or
government by the wealthy meant that cronyism was established and that this was
the most obvious way in which Asian governments have made inequality worse.
This was because businessmen who are politicians have insider access to land
and natural resources and to government contracts. The Economist pointed out
that cronyism must be curbed, particularly in emerging markets, as a freer
financial sector with market-driven interest rates will remove a potent source
of income concentration and economic distortion.
Education is a crucial factor in reducing income inequality, as can be seen in
Latin American countries. Government spending on secondary education has led to
an increase in the literate and schooled workforce, which is then able to work
in a modern economy that is very much driven by technological innovation.
The Indonesian government is still fixated on economic growth. This kind of
thinking is reflected in a 2012 publication by the McKinsey Global Institute
called The Archipelago Economy: Unleashing Indonesia’s Potential.
The McKinsey Institute has been a consultant to the Indonesian government and
claims that it helped the government “to better fulfill [its] mission to the
public” (McKinsey website). The focus of the report has been economic growth
and the ways in which to ensure further growth to attract investment.
The McKinsey publication states that Indonesia today is the 16th largest
economy in the world. There is a smattering of discussion on inequality in the
publication but not much; instead, the focus is on economic opportunity and on
the fact that Indonesia has a young population, which will be powering future
growth in incomes.
This is true. Indonesia today is also the fourth-most populous country in the
world and 44 percent of its 240 million people are under 24 years of age.
A tsunami consisting of a large youth bulge is about to arrive in our
employment sector. As Lagarde pointed out in her speech, “Inclusive growth must
also be job-rich growth,” in which a strong dimension is youth employment.
Indonesia is in the grip of large-scale corruption that is eating into our
economy and can be likened to a cancerous growth.
As for the 20 percent compulsory government spending on education, which
directly affects our youth, how much of this spending really goes into powering
knowledge and skills among our young people and how much of it
becomes operational costs for our bureaucrats?
The Indonesian government can get the McKinseys of this world to give advice
and help plan greater efficiency and effectiveness, but the crucial test lies
in implementation. Let’s stop all the image building, spinning of statistics
and political pitching.
Just get on with it and implement plans properly and effectively, because this
in itself would be a major achievement.
The writer, a former
journalist, is secretary-general of the Indonesian Community for Democracy
(KID).
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