“How The Inequality Redistribution of Income Affect The Economic Growth and Welfare in Indonesia ?

 By : Suci Sabilly

Related to my lecturer about Redistribution of Income , i would like to make a paper about “How The Inequality Redistribution Of Income Affect The Economic Growth And Welfare” , and also i would like to expain what are the factors of inequality redistribution of income in Indonesia . but , before going to the case , i will introduce abou the theory of income redistribution first , how to measure whether the distribution is equal or disparities and all of the indicators .

Procovitch ever convey about the causes of  inequality (disparities) redistribution of income are population growth, rural urban development, and governance systems plutokratis nature. Some aspects that have been alleged by Procovits in 1955 was developed by Kuznets, and today is still known as Kuznets hypothesis, which caused controversy among researchers in other countries. This hypothesis states that the relationship between  rate of economic growth with disparities (inequal) redistribution of income is negative.  So, in the first stage of economic development will experience level disparities (inequal) redistribution of income gets worse,stable and eventually decrease . The reasons are the occurrence of
concentration of wealth at the top, less effective as a progressive tax,and the accumulation of capital ownership.

There are three general concept in order to measure whether the redistribution of income is equal or not, those are:

1.        1. the individual income distribution indicators.

2.       2. the Lorenz curve.

3.       3. the Gini coefficient.

Each of these indicators have relationships with each other. The further the Lorenz curve from the line diagonal the greater the income distribution inequality. So on the contrary, the Lorenz curve coincides with the diagonal line, more equitable income distribution.

As for the gini coefficient,the smaller the value, indicating a more equitable distribution. And the personal distribution of income or size distribution of income directly calculate the amount of income received by each individual or household. It is important to note that personal distribution only measure how much income received by someone, no matter from which source, whether it be interest savings or savings, operating income, debt, gift or inheritance. But the which the indicator Often use to measure the redistribution of income are Gini ratio and the World Bank criteria.

The problems of inequal (disparities) redistribution of income in Indonesia:

1. Size distribution of income

Revenue When viewed from the SUSENAS results using Gini coefficient, it will show that the distribution of income in urban areas in Java is worse than the regions outside Java, as well as regional rural areas of Java have high levels of income distribution is low when compared to regions outside of Java.

2. Urban-rural income disparities

According to the World Bank, Indonesia's development pattern shows an urban bias, that is development oriented to urban areas, with heavy pressure on the organized industrial sector, which is both a cause occurrence of disparities (inequal) redistribution of income that's worse in the future.

According to Michael Lipton, a British economist, urban bias often occurs in
developing countries like Indonesia where the allocation of resources
more priority in urban areas than the efficiency considerations. Again we note a dualistic explanation of economic theory about disparities occur (inequal) redistribution of income in these countries are flourish, first seen in the pattern of inequal
between urban and rural areas. Oshima explains this situation
(Disparities in the village is higher than in cities), as being unique. He
predict disparities (inequal) redistribution of income will be even wider if the development process rural areas will continue.

3.Regional income disparities

inequal in economic development between various regions in Indonesia and the distribution of natural resources does not cause uneven inequality in income distribution across regions in Indonesia in particular. A big disparities in redistribution of income or inequality economic and poverty are two major problems in many countries developing world, not least in Indonesia.

Trends in income distribution:

1. Gaps Town and Village

2. Regional Gaps

3. Interpersonal Gap

4. Gap Between Social Group

Poverty and income inequality are two different things. Poverty is associated with an absolute standard of living, while inequality of income associated with the relative living standards of the entire community.

Category inequality of income is determined by using criteria such as the following:
•   high income inequality

•  medium  income gap

•   low income gap

gap’s problem has occurred and experienced by this nation since the colonial era. Over time, the disparities (inequal) in redistribution of income as has become tradition in the life of this nation. This followed starting from the first administration, from the Old Era until now, and The most serious problem is when the New Era was standing up .

In general, the factors of disparities (inequal) redistribution of income in Indonesia, Such as:

1. High population growth which results in lower income per capita.

2. Inflation in which money incomes increased but not followed proportionally by the increasing production of goods

3. Development of inter-regional inequality

4. Investment is very much in the project - the capital-intensive projects (capital
intensive), so the percentage of capital income from the additional property of
compared with the percentage of income derived from employment so that
unemployment increase.

5. The low social mobility.

6. The implementation of industrial policy which resulted in import substitution increase in price - the price of goods to protect the capitalist’s business.

7. The destruction of industry - handicraft industry people such as furniture, industrial,households, etc .

Starting from the income distribution disparities which then triggered the inequality of income as impact of poverty. it will be if the two very serious problems. The protracted and increasingly severe left, it will eventually political and social consequences that impact is negative.

Disparities related to the distribution of results such as income, wealth, consumption, and other dimensions of what is referred to as welfare. The concept of inequality must be distinguished from the concept of equity which refers to the distribution opportunity (opportunities), which covers aspects of economic, political, and social.

In the World Development Report 2006, World Bank (2006) argues that Inequality in access to economic opportunity and influence to economic development.

The problem which very close to the  poverty is Inequality or the gap between the poor and the rich. When the redistribution of resources from the rich to the poor inequal, aggregate saving rate in an economy also will likely declines, and capital accumulation
declines with economic growth, it means that welfare will also be reduced.

Conclusion:

-          According to Kuznet, the relationship between the level economic growth rate with disparities (inequal) redistribution of income can be negative. at the first stage of economic development will experience the level disparities of redistribution of income be worsen, and than be stable and eventually decrease. . The reason is the occurrence of concentration of wealth at the top, less effective as a progressive tax,
and the accumulation of capital ownership.

-          Based on the indicators (personal income, the Lorenz curve, Gini coefficient and the world bank's criteria), the redistribution of income in Indonesia still disparities. By using Gini coefficient, it will show that the distribution of income in  Java has a high rural income distribution gap when compared to regions outside of Java. Then, the allocation of resources more priority in urban areas, and also disparities in economic development between various regions in Indonesia and the distribution of natural resources are not equitable . that was the example of  inequality in income distribution across regions in Indonesia.

-          The definition of economic growth must be distinguished from the development of economy, economic growth is only one aspect of economic development that’s more emphasis on improving output aggregate.

living standards improved through the economic growth. But The disparities redistribution of income can reducing the economic growth and also the economic and social welfare. The problem which is very close to the poverty is the gap between the poor and the rich (inequality the savings will be decrease when the redistribution of income is diparities , and the amount of capital will be less . it means that there is reducing in investment . the economic growth is declining as the accumulation of capital declining . and  it lead to the worse off both of economic and social welfare .