Asset concentration and quality of growth in Indonesia
Winarno Zain, AN ECONOMIST
Sumber : JAKARTA POST, 30 November 2011
The list of the 40 richest Indonesians as published by Forbes magazine recently revealed the extent of asset concentration in this country.
According to the magazine, the 40 richest Indonesians possess combined assets worth US$85.1 billion, which accounts for 15 percent of the Indonesian GDP. The top three on the list have amassed $35.1 billion among them.
High asset concentration translates into high inequality of income. This is because the dynamics of the business are such that the higher the asset you deploy, the more rapid your income growth.
As the gap in income distribution among Indonesians is widening, some intriguing questions about government policies are unavoidably raised. If the 40 richest people sold their assets today, they would receive more than the entire tax revenues received by the government in 2010.
This perspective raises the question of the appropriateness of the amount of government tax revenue. Is tax revenue that ridiculously low? The question also indicates the extent of the problem of tax evasion and corruption and how vigorous are the bureaucratic reforms being pursued by the Finance Ministry.
The other question that arises from the above figures is how serious is the government in alleviating poverty? Because, how could the wealth of the three richest Indonesians be so much higher than the state budget allocated for building infrastructure and social spending this year?
The government’s limited spending in fighting poverty, at a time when the richest are racing ahead at high speeds, means that income distribution would continue to widen. The unequal distribution of assets between different social groups is too glaring to escape attention from anybody.
The uneven distribution of wealth started when a group of companies through political connections acquired economic resources and leases from the state. The close links between the state and conglomerates that generated the wealth concentration took several forms.
Private companies benefited from the state-sanctioned barriers to competition, mainly through trade protection. The state also created officially sanctioned cartels, exclusive licensing and public sector dominance by a certain company through a government fiat, control and taxes on intra-country trade.
Additionally, politically connected firms received benefits in other forms such as being awarded exclusive contracts, loans from state banks without having to provide appropriate collateral, bankruptcy bailouts and lax regulation.
There were also several instances where state and military officials, both active and retired, could be found sitting on the boards of private companies. These activities were subject to rent-seeking with heavy losses to either the state-owned enterprises or the state.
As they acquire more assets, they grow faster than other groups. Unequal speeds in growth between various economic groups result in a higher asset concentration in the groups with higher assets at the start.
One of the outcomes of asset concentration is reflected in the Jakarta Stock Exchange, where around 70 percent of the listed companies are family-controlled and about 57 percent of stock market capitalization is controlled by the top 10 families, the highest figure in East Asia.
There are also other forces at work that perpetuate the unequal distribution of income. The decline of productivity in agriculture and in labor-intensive exporting industries during the last decade have forced workers from these sectors to move into the informal sector that offer lower wages. The continuing labor surplus has resulted in the marginal increase in wages for these workers.
The advance in technology has put a premium on workers who have special skills. Those who have specialized skills can more easily enter the job market with relatively higher salaries.
Unfortunately, the majority of Indonesian workers are graduates of elementary school and junior high school and are involved in manual labor with low wages.
One of the devastating effects of the high inequality of income is the sharp social division among different groups in the country. During the strong authoritarian regime of president Soeharto, these social divisions were severely suppressed to give the appearance of social stability.
The loosening of political control by subsequent governments has let loose the forces of social conflict that have been brewing for a long time. The types of conflicts range from armed rebellion in Aceh and Papua, to ethnic conflict in Kalimantan, to religious violence in Maluku, to industrial-related violence in Batam and Freeport mining in Papua and to the numerous strikes by labor unions.
Although the conflict has taken many forms, the underlying cause is basically the unequal distribution of wealth that creates anger, jealousy and resentment among the social groups. As long as the fight over control of economic resources is not settled fairly, tension and violence will persist.
Empirical evidence in the 1970s showed that countries that experienced the sharpest drops in growth were those that had high levels of social division with weak institutions of conflict management as indicated by poor governance and the absence or a lack of rule of law, democratic rights and social safety nets.
The trend toward higher income inequality could be mitigated through setting up a distributive mechanism. The current economic policies have contained some distributive mechanism elements, but they are not enough.
Fiscal policies are not adequately progressive, since Indonesia still adheres to the flat rate regime in its taxation. The tax burden of those in the top income brackets is relatively equal to the tax burden of those in the lower income brackets.
Fuel subsidies are still highly regressive, where 70 percent of subsidies are enjoyed by the rich. Government programs directly targeted to the poor like direct cash transfers, rice for the poor, free schooling and healthcare, have not significantly reduced the number of the poor. Because of the weak distributive mechanisms, the inequality of income is bound to increase.
In the long run, high inequality of income could slow economic growth, since most additional income from growth would be received by a certain group, leaving the majority of people with stagnant purchasing power.
Future policies should be based not only on how much the economy should grow, but also on how the growth in income is to be distributed. ●
High asset concentration translates into high inequality of income. This is because the dynamics of the business are such that the higher the asset you deploy, the more rapid your income growth.
As the gap in income distribution among Indonesians is widening, some intriguing questions about government policies are unavoidably raised. If the 40 richest people sold their assets today, they would receive more than the entire tax revenues received by the government in 2010.
This perspective raises the question of the appropriateness of the amount of government tax revenue. Is tax revenue that ridiculously low? The question also indicates the extent of the problem of tax evasion and corruption and how vigorous are the bureaucratic reforms being pursued by the Finance Ministry.
The other question that arises from the above figures is how serious is the government in alleviating poverty? Because, how could the wealth of the three richest Indonesians be so much higher than the state budget allocated for building infrastructure and social spending this year?
The government’s limited spending in fighting poverty, at a time when the richest are racing ahead at high speeds, means that income distribution would continue to widen. The unequal distribution of assets between different social groups is too glaring to escape attention from anybody.
The uneven distribution of wealth started when a group of companies through political connections acquired economic resources and leases from the state. The close links between the state and conglomerates that generated the wealth concentration took several forms.
Private companies benefited from the state-sanctioned barriers to competition, mainly through trade protection. The state also created officially sanctioned cartels, exclusive licensing and public sector dominance by a certain company through a government fiat, control and taxes on intra-country trade.
Additionally, politically connected firms received benefits in other forms such as being awarded exclusive contracts, loans from state banks without having to provide appropriate collateral, bankruptcy bailouts and lax regulation.
There were also several instances where state and military officials, both active and retired, could be found sitting on the boards of private companies. These activities were subject to rent-seeking with heavy losses to either the state-owned enterprises or the state.
As they acquire more assets, they grow faster than other groups. Unequal speeds in growth between various economic groups result in a higher asset concentration in the groups with higher assets at the start.
One of the outcomes of asset concentration is reflected in the Jakarta Stock Exchange, where around 70 percent of the listed companies are family-controlled and about 57 percent of stock market capitalization is controlled by the top 10 families, the highest figure in East Asia.
There are also other forces at work that perpetuate the unequal distribution of income. The decline of productivity in agriculture and in labor-intensive exporting industries during the last decade have forced workers from these sectors to move into the informal sector that offer lower wages. The continuing labor surplus has resulted in the marginal increase in wages for these workers.
The advance in technology has put a premium on workers who have special skills. Those who have specialized skills can more easily enter the job market with relatively higher salaries.
Unfortunately, the majority of Indonesian workers are graduates of elementary school and junior high school and are involved in manual labor with low wages.
One of the devastating effects of the high inequality of income is the sharp social division among different groups in the country. During the strong authoritarian regime of president Soeharto, these social divisions were severely suppressed to give the appearance of social stability.
The loosening of political control by subsequent governments has let loose the forces of social conflict that have been brewing for a long time. The types of conflicts range from armed rebellion in Aceh and Papua, to ethnic conflict in Kalimantan, to religious violence in Maluku, to industrial-related violence in Batam and Freeport mining in Papua and to the numerous strikes by labor unions.
Although the conflict has taken many forms, the underlying cause is basically the unequal distribution of wealth that creates anger, jealousy and resentment among the social groups. As long as the fight over control of economic resources is not settled fairly, tension and violence will persist.
Empirical evidence in the 1970s showed that countries that experienced the sharpest drops in growth were those that had high levels of social division with weak institutions of conflict management as indicated by poor governance and the absence or a lack of rule of law, democratic rights and social safety nets.
The trend toward higher income inequality could be mitigated through setting up a distributive mechanism. The current economic policies have contained some distributive mechanism elements, but they are not enough.
Fiscal policies are not adequately progressive, since Indonesia still adheres to the flat rate regime in its taxation. The tax burden of those in the top income brackets is relatively equal to the tax burden of those in the lower income brackets.
Fuel subsidies are still highly regressive, where 70 percent of subsidies are enjoyed by the rich. Government programs directly targeted to the poor like direct cash transfers, rice for the poor, free schooling and healthcare, have not significantly reduced the number of the poor. Because of the weak distributive mechanisms, the inequality of income is bound to increase.
In the long run, high inequality of income could slow economic growth, since most additional income from growth would be received by a certain group, leaving the majority of people with stagnant purchasing power.
Future policies should be based not only on how much the economy should grow, but also on how the growth in income is to be distributed. ●
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