Why has income inequality increased rapidly in Indonesia between 2003 and 2011?

Income inequality in Indonesia increased rapidly between 2003 and 2011. The Gini coefficient increased 28 percent, from 0.32 to 0.41 over the period. My dissertation aims to identify the underlying driving factors behind the drastic increase. The dissertation deals with the three potential driving factors for the rising income inequality in Indonesia: The commodity boom in 2003-2011, the changes in the structure of Indonesian growth, labour market and wages in the 2000s, and the impact of fiscal policy. I find that the commodity boom between 2003 and 2011 had a strong distributional consequence by substantially altering the distribution and relative returns of capital and labour through two channels: Firstly, through generating prominent capital-incomes for the capital-owners. And secondly, the commodity boom was associated with the adverse development in Indonesian labour market in the 2000s via Dutch Disease effects. The labour market development, for the lower income quintiles,...Show moreIncome inequality in Indonesia increased rapidly between 2003 and 2011. The Gini coefficient increased 28 percent, from 0.32 to 0.41 over the period. My dissertation aims to identify the underlying driving factors behind the drastic increase. The dissertation deals with the three potential driving factors for the rising income inequality in Indonesia: The commodity boom in 2003-2011, the changes in the structure of Indonesian growth, labour market and wages in the 2000s, and the impact of fiscal policy. I find that the commodity boom between 2003 and 2011 had a strong distributional consequence by substantially altering the distribution and relative returns of capital and labour through two channels: Firstly, through generating prominent capital-incomes for the capital-owners. And secondly, the commodity boom was associated with the adverse development in Indonesian labour market in the 2000s via Dutch Disease effects. The labour market development, for the lower income quintiles, was characterized by increased shifts from higher productivity and formal employment to low productivity, low pay, and informal employment in the service sector and small manufacturing firms. While simultaneously the formality rate and skill premium increased in the highest income quintile relative to the rest. I also find that the use of fiscal policy to mitigate the distributional consequences of the commodity boom has been inadequate. The fiscal policy between 2003 and 2011 has, to a large extent, neglected pro-poor and pro-growth measures, strongly reflecting the lack of political will to balance out the increasingly unequal income distribution in Indonesia.Show less

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Why has income inequality increased rapidly in Indonesia between 2003 and 2011?