Why is growth less inclusive in Indonesia?

The speed of poverty reduction in Indonesia has begun to slow down with inequality continuing to rise significantly. Examining the macroeconomic dataset for last three decades, this study found that inclusive growth is observed only during 1980s in which one percent of economic growth could reduce the poverty rate by 0.72 percentage point and the Gini index by 0.0021 point. Nevertheless, during the 1990s and 2000s, the growth is less inclusive as indicated by shrinking the elasticity of poverty to growth and the positive elasticity of inequality to growth. The elasticity of employment to growth has also continuously declined from 1.12 (1985) to 0.21 (2012). There are two possible reasons for less inclusive growth in Indonesia: first, the Indonesian economy is moving into more services-oriented economy and capital-intensive sectors such as mining, financial and telecommunications that create less job opportunities particularly for unskilled labor. It deprives the poor to benefit from a rising economy. Second, the productivity of industrial sector and service sector is more than seven-fold and three-fold of the agriculture’s productivity, respectively. Consequently, the employees working at service and industry sectors are benefit much more than those working in agriculture sector. However, Indonesia has already two essential elements of the necessary condition for inclusive growth that are the stable macroeconomic condition and sound economic fundamentals. The government should now focus on the sufficient condition for inclusive growth that strengthens micro level policies such as financial inclusion, improving access to education, health insurance and other social policies.